Britain's largest provider of rented vans a firm that gets more than a third of its sales from economically troubled Spain may not sound a tempting investment proposition. But anyone who ignores it might be missing a trick.
A few years ago Northgate was a complete basketcase. Loaded up with debt, with lots of its vans being rented by the building trade, it was caught out as the UK and Spanish economies crashed. For a while, there were doubts that the company could even survive. But having steadied its position in both countries and reduced its exposure to construction, Northgate may be just the type of business that is well suited to austere times.
Northgate's customers like flexibility. They only have to rent a van for as long as they need it and can give it back when they're finished with it with no financial penalty. It saves them from the hassles of shelling out cash on new vans, keeping them running and then selling them on.
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In return for this flexibility, Northgate charges slightly more than if they were leasing the vans on a long-term contract. So it must make sure its vans are out on hire and earning money most of the time rather than sitting idle and losing value. The good news is Northgate's vans earn money around 90% of the time.
Northgate plc (LSE: NTG)
The firm is also becoming more efficient. Costs are being cut and it is no longer chasing business with silly prices. Its van fleet in both the UK and Spain has been trimmed down to a manageable size, and it is selling vans for a profit. The overall focus is on generating cash, paying down debt and improving returns.
Spain remains a precarious place to do business and a recession in the UK would not be helpful. But there is not a huge amount of downside risk in the shares. Most of the firm's borrowings are at fixed interest rates and the debt pile continues to come down. Profits don't have to grow much for the shares to be good value.
To me, the shares look cheap at just over eight times next year's earnings. Dividends have just been reinstated and should continue to grow. Northgate also trades below its tangible net asset value (NAV) of 265p per share, despite healthy returns on capital of 13%. As most of its NAV is tied up in white vans, investors can rely on the number as the firm sells thousands of them every year, in many cases at a profit.
VERDICT: SPECULATIVE BUY at 253p
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