Redde Northgate merger drives growth

Road traffic accidents rarely spell good news. However, for Redde Northgate (REDD) busier roads post-lockdown have provided a welcome boost to revenues. The car hire, sales and insurance group is now gaining momentum after its 2020 merger, but progress could be impeded by the UK’s imminent transition to electric vehicles. 

Across the UK and Ireland, hire revenue was up 16 per cent in the six months to 31 October, and rental profit has almost doubled following rate increases and more demand for vans. Spain also saw revenue and profit rise, albeit not as sharply. 

Its claims and services arm is also recovering well as a result of more traffic on the roads: accidents and incidents have almost returned to pre-Covid-19 levels. In a boost to future growth, the group has secured new contract wins with Tesco (TSCO) and Admiral (ADM). Chief executive Martin Ward said these deals underline the success of the merger between Redde and Northgate.

Vehicle sales have fared less well, with revenue falling by almost 30 per cent year on year. This was partly due to a high number of sales this time 12 months ago, but was also down to problems with supply: high rental demand and reduced vehicle supply meant there were fewer vehicles for disposal, albeit at a higher sales price. 

However, management said its strong relationships with suppliers, together with bolt-on acquisitions, would ensure it had enough vehicles to meet its growth expectations. Indeed, the fleet is growing significantly to meet rental demand and capital expenditure is on the rise. Some £13.2m was spent on ‘growth capex’ over the past six months, which represents the cash consumed in order to grow the fleet. 

As a result of its investment activities, free cash flow has plunged from £59m to an outflow of £7.6m.

The market reacted very positively to the group’s results, sending the share price up over a tenth, and consensus forecasts compiled by FactSet see full-year earnings per share hitting 41p, a third higher than last year and the year before. 

Further out, the picture is less clear. Electric and hybrid vehicles still only account for 2 per cent of the overall fleet, and the lack of charging infrastructure in its key markets is particularly problematic. However, change is coming and, from 2030, the sale or lease of new internal combustion engines will be banned in the UK. This will likely damage the residual value of internal combustion vehicles and restrict the group's reselling opportunities, raising the risk of heavy write-downs. Hold. 

Last IC View: Hold, 405p, 7 July 2021