Results out this week for the 12 months to end December 2013 show that profits fell significantly as anticipated, but importantly second half profits were up almost 30 per cent on the first half as the recovery kicked in. Indeed, in the second half the company turned in adjusted operating profits of £2.3m on revenues of £77.5m, albeit they were still £900,000 shy of the same period in 2012. Still, this was quite a sharp improvement on the first half when revenues were down slightly at £79.1m, but underlying operating profits almost halved from £3.6m to £1.9m 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.
To recap, 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 almost £100m of the £134m revenue generated by the company’s repair centre division last year, but with motor claims frequency trending down, and industry supply exceeding demand in the insurance market place, this resulted in a 7.6 per cent revenue decline on the prior year. But that’s looking out of the rear view mirror, what is more relevant is what lies on the road ahead.
A fast track to recovery
On this front, chief executive Michael Wilmshurst notes that “the worst effects of the economic cycle are behind us now and the slowing rate of decline in insurance-funded repairs is evidence of this. The increase in new vehicle registrations, growth in the total number of vehicles on our roads and rise in miles travelled are all positive indicators.” In fact, several industry experts are predicting work volumes will stabilise in the near term. It’s also worth pointing out that the acceleration in the rate at which bodyshop operators are facing distress, as weaker companies go out of business, is clearly positive to Nationwide Accident Repair. That’s because the company has the resources available to make value enhancing acquisitions and consolidate its market leading position.
In fact, on the back of a robust cashflow performance, Nationwide Accident Repair’s cash pile rose by £1.2m to £6.3m last year. This should support further bolt-on deals following the acquisition of 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. Revenue generated from the fleet market increased by 23 per cent to £31.2m last year, but with a market share of less than four per cent there is potential to increase exposure to a market worth £900m in the UK alone. There is also scope to make gains in the £500m retail funded market where the company has a market share of less than one per cent.
Moreover, even after factoring in a £1.7m cash outflow for the Exway acquisition, and a £2.6m payment to its pension fund, Nationwide Accident Repair was still able to increase its cash balance by £1.2m. In addition, the company has a bank facility of £20m including a £15m three-year revolving credit facility, to make further strategic acquisitions. And that’s exactly what the management team under Mr Wilmshurst has been doing.
For instance, a couple of months ago, the company acquired 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 was £4.1m in cash and there is an earn-out of upto £1.75m, dependent on profit targets being hit. Howard Basford made an operating profit of £500,000 on revenues of £16m in 2013, so the acquisition is immediately earnings enhancing. It also boosts Nationwide Accident Repair's presence in the north west of England.
Earnings and dividends set for bounce
Post results, analyst Kevin Fogarty at broker Westhouse Securities expects the company’s adjusted pre-tax profits to increase from £3.1m in 2013 to £4.9m this year, having factored in a £600,000 upgrade after the Howard Basford acquisition. On this basis, expect underlying EPS of 8.4p, over 60 per cent higher than the 5.1p reported last year. This means that the shares are trading on a prospective PE ratio of 10 for 2014, hardly a punchy valuation for a recovery play and one where further upgrades are possible if more strategic deals are done in what is a consolidating industry.
There is a dividend support, too, as the board have just declared a final dividend of 1.9p a share to give a full-year payout of 2.9p and a yield of 3.5 per cent. Admittedly the dividend was down sharply from the 5.5p paid out in 2012, but this sensibly reflects a more conservative payout ratio as the board seek to make bolt-on earnings-enhancing acquisitions. Furthermore, with earnings per share set to recover strongly to 8.4p this year as Westhouse predict, this supports the broker’s dividend forecast of 3.8p a share covered 2.2 times by prospective post-tax earnings. A forward yield of 4.5 per cent is clearly attractive.
True, the company has a deficit of £18.7m on pension obligations of £92m, with £52.8m of the pension fund invested in equities - split a 70:30 between and overseas and the UK - and £16.5m in corporate bonds. A further £4m is held in other investments. It goes without saying that a further rise in equity markets would be helpful to narrow the deficit further, but even if that doesn’t happen the £2.6m annual contribution made by the company to its pension fund is already factored into analysts’ pre-tax profits estimates.
Target prices
From a technical perspective, the shares are interestingly poised and look ready to make progress back towards the mid-February high of 92p. Beyond that there is very little resistance until the 2011 highs around 105p. Trading on a bid-offer spread of 82p to 84p, valuing Nationwide Accident Repair Services at £36.3m, the price is up nine per cent since I initiated coverage a couple of months ago (‘Time to motor ahead’, 18 February 2014) and the shares continue to rate a decent buy. My target price remains 105p, or the equivalent of 12 times 2014 prospective earnings.
Please note that I am working my way through a long list of companies on my watchlist that have reported results or made announcements recently including: Pure Wafer (PUR), Eros (EROS), Inland (INL), Netplay TV (NPT), API (API), H&T (HAT) and Record (REC).
