Analysts at Equity Development are encouraged by the interim results for Northbridge Industrial Services (LON: NBI). The move to a positive, albeit modest, adj. PBT for the first time since H2 2014, signifies that a major milestone has been reached. The step to profits is six months ahead of our expectation. We have increased our adj. PBT estimate for FY2019, anticipating that the recovery in the Group’s markets is likely to broaden further and the operational gearing push profitability higher. In-line with the modest uplift in our FY2019 adj. PBT estimate, our DCF-based fair value increases over 50% above the current share price.
The half-year results for Northbridge were ahead of forecasts. The gross margin increased 500 basis points to 44.7%, driven by the 23.6% (£2m) y-o-y uplift in the level of higher-margin rental sales. Despite costs (Cost of Sales plus OpEx) rising to their highest level since H2 2015, the Group still managed to deliver its second consecutive EBIT for the first time since H2 2014.
Crestchic performed well both in rental sales (up 21%) and in manufactured sales (34% higher), reflecting a combination of a widening of the recovery in the Group’s markets. The division began the year with its highest ever manufacturing New Year order book, reflecting higher demand from the USA and Europe. The strong progress in rental was despite H1 2018 benefitting from the 2018 FIFA World Cup in Russia. Underpinning the uplift in rental was the UK and European market, aided by recovery in the Middle East.
Tasman delivered revenues 29% higher y-o-y and more than doubled from the levels of two years ago during H1. The main driver was the improving Australian gas and LNG markets, although two new oil fields began to contribute during H1. While volumes have begun to rise in energy markets, reflecting the effect of higher oil prices on exploration and production, prices appear to be bumping along the bottom (though they are stable). Lead times with manufacturers of tubing and other kit have begun to lengthen, suggesting that price rises may occur from FY2020.
The Group continues to benefit from high levels of operational gearing, reflecting the fact that most Group revenues come from rental activities (62%).
We have modestly increased our adj. PBT estimate for FY2019 from a break-even position to £0.2m, rising to an unchanged £2.5m in FY2020. Following a stronger than anticipated H1 in 2019, we have raised revenue estimates by 10.2% in FY2019 and 5.6% in FY2020, suggesting the FY2020 uplift will be predominantly driven by Tasman. Also, our net debt estimate for FY2019 rises by £0.6m to £5.6m, reflecting higher than previously anticipated capex as management invests in the hire fleet.
Northbridge Industrial Services achieved the key milestone of returning to profitability during H1. Arguably, the next goal is a resumption of dividend payments. Ahead of this, profitability needs to improve further, coupled with rising confidence in the outlook for the business.
The ongoing pace of the recovery in the Group’s markets greatly encourages us. The modest increase in FY2019 estimates results in an uplift in our DCF-based fair value per share.
