It’s a company I have followed for some time having initiated coverage when the price was 77p ('Time to motor ahead', 18 Feb 2014). My last update was a couple of months ago when the price was around the current level (‘Exploit value opportunity’, 21 July 2014). It’s fair to say that the response of investors to the company’s latest contract win has been muted to the say the least, but that does not detract from the significance of the award nor the positive implications for earnings for the business.
Following a competitive tender process, Nationwide has just announced a major new contract with Allianz Insurance to become one of only two preferred suppliers for vehicle accident repair and repair management services across the UK. The deal is estimated to be worth approximately £10m per year once fully implemented and starts immediately. Under the terms of the agreement, Allianz will use a range of Nationwide's vehicle repair services which include mobile and specialist glass services, courtesy vehicles as well as bodyshop-based repairs. The contract follows Allianz's decision to consolidate its supply chain in order to gain operational efficiencies and provide better customer service.
Earnings estimates well underpinned
Importantly, this contract adds further weight to the upbeat forecasts of analysts for Nationwide’s earnings recovery this year. Analyst Kevin Fogarty at brokerage Westhouse Securities expects fiscal 2014 adjusted pre-tax profits and EPS to increase by around 60 per cent to £4.9m and 8.4prespectively. In other words, with the shares trading on a bid-offer spread of 70p to 72p, the prospective PE ratio is only 8.5, a modest valuation for a recovery play and one also doing smart strategic deals in what is a consolidating industry.
There is a dividend support, too, as the board declared a payout of 2.9p a share in 2013. True, this was down on the prior year but that largely reflects the policy to make bolt-on earnings-enhancing acquisitions, a sensible strategy in light of the consolidation in the industry. In any case, Westhouse predict the dividend will rise to 3.8p a share in 2014, covered more than twice over by the aforementioned earnings estimates. On that basis, a forward yield of 5.4 per cent is attractive in my view.
It’s also worth flagging up that at the annual meeting the company reported that trading was in line with management expectations. This latest Allianz contract win can only underpin those earnings forecasts. And it’s not an isolated contract either as Nationwide won another major contract worth £10m a year with insurer AXA UK a few months back too. Combined these two new contracts equate to around 13 per cent of last year’s annual revenues of £156m so are clearly significant. Moreover, when Nationwide reports its interim results at the end of this month I firmly expect the board to note their importance.
Acquisitions performing well
I also expect the board to announce that the acquisition of Exway Coachworks, a vehicle accident repair business operating in the south west of England, and the Howard Basford bodyshop chain acquisition are both performing well. Howard Basford is a leading provider of crash repair services in the north west of England and the eighth largest independent bodyshop chain in the UK. The selective acquisition highlights how the company is increasing its geographic reach and in a smart way as the purchase boosts earnings per share.
That’s because under the terms of the acquisition the initial cash consideration was only £4.1m in cash all of which was funded from net funds on Nationwide’s balance sheet. There is an earn-out of up to £1.75m which I expect to be paid too. Howard Basford made an operating profit of £500,000 on revenues of £16m in 2013, so even if the full amount of the deferred consideration is settled then this is a far better use of Nationwide’s low yielding cash pile given the profits now being earned. It also makes sense for Nationwide Accident Repair to further bulk up its operations by making similar acquisitions in order to target the fleet and retail accident repair market. The company certainly has the funds to do so as it has a bank facility of £20m, including a £15m three-year revolving credit facility.
True, a £18.7m pension deficit means that the company currently makes a £2.6m annual contribution to its employee pension fund, but this is already factored into the above analysts' pre-tax profits estimates. In any case, the anticipated recovery in profits should mean that the company can easily fund this pension contribution and at the same time increase the payout to shareholders.
So with investors failing to note the significance of the two major contract wins, and with the contribution from acquisitions also driving the profit growth, I feel that the shares are being harshly rated on a forward PE ratio of eight. From a technical perspective, a move above the July high of 78p would be bullish signal indeed and in my view would set up a much overdue return to the February high of 92p and beyond.
Needless to say, ahead of the half-year results later this month, I continue to rate the shares a recovery buy and my target price remains 105p, or the equivalent of 12 times 2014 prospective earnings.
Please note that Netplay TV (NPT: 11p), SeaEnergy (SEA: 38p) and Fairpoint (FRP: 133p) issued half-year results yesterday. I will be updating my views on all these compnaies in due course.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
