The problem was not just the high level of indebtedness, although that was a major concern for me at the time as net borrowings of £350m dwarfed net assets of £135m, but the company also had to contend with declining second-hand car values on its extensive fleet. In the end, long suffering shareholders were virtually wiped out by the time the company agreed a debt for equity swap with its creditors and raised £58m in a placing in March 2013 in order to recapitalise its balance sheet and give the company yet another chance.
But that financial lifeline has clearly worked as the latest half-year results show. The change of name toRedde (REDD: 108p), a Latin word associated with restoration, could not have proved more appropriate in describing the restructured group's activities, strategic aims and new business focus. Helped in part by working together with the insurance industry on claims cases rather than being a proverbial thorn in their side, the company has been steering a far safer course for shareholders.
Critical to this turnaround was a new management team led by chairman Avril Palmer-Baunack, a former deputy chief executive and chairman of transport group Stobart (STOB: 102p), and chief executive Martin Ward, an insurance industry stalwart. The transformation in the company's fortunes has been truly eye-catching, which explains why Redde's shares have quadrupled since the rescue fundraising at 25p a share a couple of years ago. The fact that shareholders are being rewarded with a regular income stream, rather being asked to bail out the company, is playing a part, too. Redde has paid out dividends of 12.5p a share in the past two years alone, and following an upbeat set of half-year results for the six months to the end of December 2014, and a 13 per cent profit upgrade for the current financial year and next that followed, analysts expect the full-year dividend to be raised by a third to 7.5p a share.
True, a 20 per cent-plus increase in full-year EPS to 7.9p means that cover on that payout is wafer thin, but it's in keeping with the board's policy to distribute as much of the profits as it reasonably and legitimately can, in the absence of unforeseen circumstances. Moreover, with net cash of £38m on the balance sheet at the end of last year, or the equivalent of 13p a share, the company has ample funding for its working capital needs.
Potential for earnings enhancing acquisitions
In fact, in the results release the board pointed out that they have around £25m available for acquisitions, but this capital will only be targeted at businesses that are profitable, cash generative, supportive of the dividend policy and provide additional opportunities within the sectors in which the company operates. Working predominantly with insurance companies, insurance brokers and prestige motor dealerships, Redde primarily specialises in offering a range of accident management and legal services. It also deals directly with large national fleets providing incident management and mobility services.
And following the acquisition of the NewLaw group of companies in February last year, Redde's activities also encompass a range of legal services designed to assist claimant parties in partnership with leading insurance companies, and brokers. To put the scale of the operation into some perspective, the group provides legal services to over 30,000 claimants a year, ensuring they are properly compensated for their injuries and losses, and delivers accident management services to over 115,000 motorists each year to keep them mobile until their own vehicles are repaired or they are in a position to obtain a replacement.
It's only reasonable to expect the board to spend the company's cash wisely as they have done with NewLaw - the consideration including earn-outs on that acquisition represented six times historic pre-tax profits of £7m. In other words, if Redde deploys its cash sensibly then I would expect pre-tax profit uplift in the region of £3m to £3.5m on a £25m acquisition. That's not an insignificant sum considering analyst Andrew Watson at broker N+1 Singer predicts Redde will report pre-tax profits of £20.9m on revenues of £225m in the 12 months to the end of June 2015, up from £12m and £197m, respectively, the year earlier. True, a large part of that profit increase can be accounted by the contribution from NewLaw, but there is still organic growth coming through, which can be enhanced by making further bolt-on earnings-enhancing acquisitions.
Driving the business forward
Importantly, it's a much improved working relationship with clients in the insurance industry that is driving the business forward. Debtor days fell to only 108 days in the six months to the end of December 2014, or 27 days fewer than in the same period of 2013, and almost three-quarters of recoveries are now settled within 90 days. This improvement reflects a number of bilateral protocol agreements with insurers who now feel more confident in the representations being made to settle the claims. The number of open claims has fallen by 10 per cent in the past year alone and cases that have been open for four months or longer have been reduced by a fifth. As a result, the company's working capital position is much improved and cash generated from operations in the latest six-month trading period was 13 per cent more than Redde's cash profits of £14.3m.
The improvement in customer satisfaction also means Redde has greater scope to win additional business from existing clients and from new ones, too, who don't seem deterred by the group's gross profit margin of 31 per cent.
So with earnings-enhancing acquisitions on the cards, and the company on course to increase EPS by more than a fifth to 7.9p in the current financial year, I feel that a cash-adjusted forward PE ratio of less than 12 represents value, especially as the shares are well underpinned by a prospective dividend yield of over 7 per cent. In my view, a more reasonable valuation is a share price around 125p, valuing the equity at £365m and implying an enterprise value of £327m, or the equivalent of 12 times cash profits this year.
Technical set-up
Importantly, the technical indicators are supportive of another leg-up in the share price. Having rallied to 116.5p post results, Redde's share price has been consolidating its gains as the 20-day exponential moving average (EMA) plays catch up, rising from 94p to 104p. This means that the share price is no longer overextended above its rising short-term trend line. It's not that extended above the rising 50-day EMA, either, which is around the 100p price level.
In addition, the 14-day relative strength indicator (RSI) has also unwound its overbought reading, falling from over 80 at the end of last month to a more reasonable reading of 60, a level from which a sustainable rally can be launched to propel the share price to a targeted trading range between 122p and 133p, an important price level, and one representing the share price highs dating back to early 2011.
So, with both the technical and fundamentals supportive, I feel that it's worth buying the Aim-traded shares on a bid-offer spread of 107.5p to 108p. My initial target price is 125p and the timeframe for this trade is six months.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 36 companies, all of which are available on my IC homepage... and are detailed in chronological order below with the relevant web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment', 2 Mar 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inlandat 64p) ('Housebuilders: trading gains', 9 Mar 2015)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small-cap buys', 10 Mar 2015)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)
■ LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 Mar 2015)
■KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 Mar 2015)
■ Charlemagne Capital: Buy at 10.75p; Bloomsbury Publishing: Hold at 155p ('Below the radar', 19 Mar 2015)
■ Simon Thompson's 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 stockpicking'
