- Second earnings upgrade since April 2022
- New factory expansion completes
Northbridge Industrial Services (NBI: 201p), a fast-growing business that makes, sells and rents load banks and transformers for the commissioning, testing and maintenance of independent, off-grid power sources, has traded well ahead of management's expectations through the first half of this year.
Furthermore, the pipeline for both rental and sales is building for the remainder of the year, prompting the directors to upgrade their full-year guidance for the second time since April. Growth in data centre projects is the key driver, a bull point in my analysis when I initiated coverage, at 125p ('Alpha Report: A high-growth play on the battery storage boom’, 7 September 2021).
Importantly, Northbridge has significant pricing power, so can pass on cost inflation to customers to maintain margins and improve return on investment (ROI). At the same time, the group is increasing production at its newly upgraded Burton-on-Trent facility, has opened a new depot in Texas and moved to a new location in Antwerp to tap into the buoyant data centre markets.
Analysts at Equity Development raised their 2022 and 2023 revenue estimates by 8 and 12 per cent, respectively, to £39mn and £40.7mn. The business is operationally geared, so the upgrade to pre-tax profit estimates is proportionally higher at £5.2mn (16 per cent upgrade) and £5.8mn (17 per cent), or almost double last year’s result. On this basis, the forward price/earnings (PE) ratios are 14 and 12.5, low for a group that generated ROI of 18 per cent in 2021. The inflationary backdrop is working in Northbridge’s favour, too. The group’s £6mn hire fleet is insured for £40mn, a third above cost, and equipment is regularly sold on at double carrying value.
Equity Development has fair value at 249p, and PMH Capital at 260p to 290p, a valuation that reflects a “double-digit growth trajectory and long life rental fleet which requires far less replacement capex than peers”. Having last advised buying the shares at 174p (‘Geared for growth’, 12 April 2022), I raise my target from 220p to 250p and see Northbridge (to be renamed Crestchic) as a potential takeover target. Buy.
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