With this in mind, I have noted some very interesting announcements from Nationwide Accident Repair Services (NARS: 77p), the largest dedicated provider of automotive crash repair services in the UK, but a company whose profits will have fallen significantly when it reports full-year results in mid-April. But the key in stock-picking recovery plays is to anticipate when the earnings cycle has bottomed out and to catch these businesses on the way up when the bad news is all in the price and the prospect of a stronger than expected earnings recovery has yet to be fully factored in. I believe Nationwide Accident Repair Services fits the bill and I am not the only one.
Clearly, so does insurance outsourcing support services company Quindell Portfolio (QPP: 35p) which acquired 10.93m shares in the company, representing 25.3 per cent of the issued share capital, in a series of share deals in late September. The last of the purchases put a value on the shares of over 85p, or 10 per cent above the current share price.
Interestingly, Quindell's board has gone on record to state that it intends raising its stake to 29.9 per cent in due course, although it "has no intention of making an offer for the company". However, given its acquisition-led business model, I can't believe that Quindell's senior team would not be prepared at some point to launch a bid for Nationwide Accident Repair Services once the earnings recovery has firmly taken hold. It also makes sense not to raise the possibility of mergers and acquisition activity at this early stage otherwise the company's share price could run ahead of itself, which would be counterproductive for Quindell. In fact, I think the end game for Nationwide Accident Repair Services would be a takeover by Quindell. And with a market value of only £33m, the company is easy pickings for Quindell, which has a market value of £2.27bn.
Earnings recovery in 2014
As I alluded to at the start of this article, the company's earnings are likely to have bottomed last year. In the six months to the end of June 2013, revenues were down slightly at £79m but operating profits roughly halved to £1.4m due to margin pressure, an adverse workflow mix and a shortfall of repair volumes in the south west of England following the non-renewal of a contract with Aviva. The company operates a national network of 60 bodyshops, a mobile repair fleet and three Fast Fit Plus vehicle service centres which undertake maintenance, MOT, tyre replacement and other work. The insurance industry accounted for three-quarters of the £67m of revenue from this division in that six-month period, so it is a major fee earner.
However, with motor claims frequency trending down, and industry supply exceeding demand in the insurance market place, revenue generated from insurers actually fell by over 8 per cent in the first six months of 2013. The good news is that there are positive signs that the downward trend in claims is flattening out as chief executive Michael Wilmhurst noted at the start of the fourth quarter. There has also been an acceleration in the rate at which bodyshop operators have faced distress as weaker companies go out of business. This is clearly beneficial to Nationwide Accident Repair as the company is in a strong position to make value enhancing acquisitions to consolidate its position.
For example, it acquired Exway Coachworks last summer, a vehicle accident repair business operating from seven sites in the south west of England. It certainly makes sense for Nationwide Accident Repair to bulk up its operation by making selective acquisitions in order to target the fleet and retail accident repair market. This market segment generates annual revenue of £1.4bn in the UK alone, representing 40 per cent of the total market place, of which the company only has a 3 per cent market share. Revenue from fleet and retail sales accounts for only a quarter of Nationwide Accident Repair's business, but is proving resilient. In fact, the company has been enjoying robust sales to fleet customers; revenues here rose in double digits to £13.4m in the first half of last year.
And with the benefit of cost savings and efficiency gains, the company's board has the cash to do more deals. Indeed, net cash rose from £5m at the end of June to £6.2m at the start of this year even after factoring in the Exway acquisition. In addition, the company has arranged a bank facility of £20m including a £15m three-year revolving credit facility, which will support strategic growth opportunities.
These funds are certainly being put to good use as this week Nationwide Accident Repair announced the acquisition of Howard Basford, a leading provider of crash repair services in the north west of England and the eighth-largest independent bodyshop chain in the UK. The initial consideration is £4.1m in cash, with further contingent consideration of up to £1.75m dependent on future profit targets being hit. Unaudited management accounts for the year ended 31 December 2013 show a slightly improved performance over the prior year, when Howard Basford made an operating profit of £500,000 on revenues of £16m. The acquisition is anticipated to be earnings enhancing this year, significantly boosts Nationwide Accident Repair's presence in the north west of England and offers the opportunity to benefit from improved economies of scale as well as generating other savings.
Earnings upgrades
As a result of the acquisition, analyst Kevin Fogarty at broker Westhouse Securities has raised his 2014 pre-tax profit estimate from £4.3m to £4.9m and upgraded EPS estimates from 7.5p to 8.4p. So, although pre-tax profits are expected to tumble from £5.5m in 2012 to £3m last year to produce EPS of 5.3p, down from 9.9p in 2012, the company is expected to grow both profits and EPS by around 60 per cent this year. I would also expect more strategic deals to be done in what is clearly a consolidating industry as the year progresses, and earnings-enhancing ones too. But even without them, the shares only trade on a prospective PE ratio of nine for 2014.
There is a decent dividend, too, albeit Westhouse expects a total payout of 2.7p a share to be declared for 2013, down from 5.5p in 2012. The dividend was cut at the half-year stage to reflect the fact that the board wanted a more conservative payout ratio and one that offered the flexibility to make bolt-on earnings-enhancing acquisitions. That makes sense especially in light of the two sensibly priced and smart looking strategic acquisitions made to date. Moreover, with earnings set to recover strongly, then this supports Westhouse's dividend forecast of 3.8p a share for 2014. On that basis, the prospective dividend yield is attractive at around 5 per cent for 2014 with the payout covered 2.2 times by forecast net earnings.
True, the company has a deficit of £22.1m at the end of June last year on pension obligations of £90.2m, but with £46.4m of the pension fund invested in equities - split 50:50 between the UK and overseas - and £15m in corporate bonds and £4.6m in property, it's only reasonable to expect the pension liabilities to have narrowed in the past eight months given the sharp rise in equity markets. In any case, the £2.6m annual contribution made by the company to the pension fund in order to trim the deficit is already factored into the pre-tax profits estimates above.
Target prices
The positive earnings recovery and attractive dividend yield aside, the shares are interestingly poised from a technical perspective, placed modestly below the May 2013 high of 83p. Beyond this there is very little resistance until the 2011 highs around 105p. The share price has also pulled back modestly from recent highs after a strong run up post an upbeat trading statement on 23 January. This is not only positive, but in text-book style the share price has pulled back to the 20-day moving average around 75p, enabling the 14-day relative strength indicator (RSI) to move from an overbought reading of 80 at those highs to around 60 now. The unwinding of the RSI should enable the shares to start the next leg of their bull run, which started with news of the Quindell share purchase in the autumn, from a more neutral position. It's also one that I expect to start very shortly as more investors become aware of this week's hefty earnings upgrades.
Trading on a bid-offer spread of 75p to 77p, valuing Nationwide Accident Repair Services at £33m, I rate the shares a decent trading buy ahead of the forthcoming full-year results. My three-month target price is 105p, or the equivalent of 12 times 2014 prospective earnings.
