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High-growth play on decarbonisation, battery storage and data centres

A small-cap company has pushed through its third profit upgrade in as many months and is set to recycle cash from a non-core disposal into its high-growth load banks and transformers business
High-growth play on decarbonisation, battery storage and data centres
  • First-half adjusted pre-tax profit increases from break-even to £1.3m
  • Robust order book, order intake and trading above market estimates
  • Disposal of underperforming Tasman drilling tools business will make group a pure play on high growth load banks and transformers

Analysts have pushed through their third earnings upgrade for Northbridge Industrial Services (NBI:171p) after the industrial services and rental group more than quadrupled first-half operating profit to £1.6m on 22 per cent higher revenue of £19.5m.

The key driver has been Burton upon Trent-based Crestchic, a company that manufactures, sells and rents load banks and transformers to domestic and international customers. Products are primarily used for the commissioning, testing and maintenance of independent, off-grid power sources and, increasingly, for grid stabilisation, as ageing national infrastructures face the twin challenges of integrating renewable energy generation and the environmental issues posed by global warming. Specifically, Crestchic’s products assure reliability for generators and distributors of power, for industries critically dependent on back-up power to ensure business continuity in the event of a failure of their primary power supply.

The business is benefiting from growth in two key sectors: renewable energy and data centres. The transition from coal and oil-based energy sources towards cleaner and renewable energy is leading to a proliferation of smaller energy generators whose sites require commissioning and which have unique challenges for connection into established distribution networks. In turn, this is creating a greater need for testing that is driving the demand for Crestchic’s products, both for outright sale and for rental. Its load banks are on par with the most advanced and resilient systems available in the western economies for this purpose.

Moreover, battery storage farms are playing a greater role to ensure the flexible operation of power systems and are becoming increasingly integrated into the UK grid network. Crestchic offers high-voltage load tests at the grid/sub-station connection point to energy storage farms. The ongoing worldwide growth in hyper-scale data centres is also driving significant demand for Crestchic solutions as the digital economy takes an ever-increasing share of global GDP. Global internet traffic doubled between 2016 and 2019, and is on course to double again by 2022, thus driving investment in new data centres and the infrastructure that supports their electricity needs and power reliability.

These factors, and a greater proportion of higher-margin rental revenue in the mix, explains why Crestchic’s operating profit almost trebled to £1.9m on 43 per cent higher sales of £15.8m in the first half. Buoyed by a robust order book, analysts at Equity Development expect the division to post full-year operating profit of £5.5m (10 per cent upgrade) on revenue of £29.6m which feeds through to a 24 per cent upgrade in group earnings per share (EPS) to 8.7p.

Furthermore, Northbridge's Tasman drilling tool rental business is in the process of being divested, which should wipe out net debt of £4.5m and leave the group as a pure play on a high-growth business that analysts at Panmure Gordon expect to produce free cash flow of £6.2m in 2022. This is based on full-year pre-tax profit rising by a third to £4m to deliver EPS of 10.4p (15 per cent upgrade) in 2022. Equity Development has almost identical forecasts and expects the board to reinstate the dividend by declaring a 2022 payout of 1.5p a share. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 16.5.

Northbridge’s progress has not been lost on investors as the share price has rallied 37 per cent since I highlighted the opportunity only three weeks ago ('Alpha Report: A high-growth play on the battery storage boom’, 7 September 2021). Given the scale of the upgrades, I am raising my target from 180p to 200p. Buy.

Finally, one of my 2019 Bargain Shares, TMT Investments, has announced a subscription offer, details fo which I have covered in the following article.

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