Van shortages constrain growth at Redde Northgate

In 2020, insurance services business Redde merged with van hire company Northgate to form Redde Northgate (REDD). The deal seems to be bearing fruit: management has noted good cross-selling opportunities and the group’s underlying profit before tax is up by 6 per cent year on year. (Statutory profits have been inflated by a £28mn adjustment for depreciation.)

However, discrepancies are starting to emerge between the two sides of the business. Northgate has been affected by a shortage of new vehicles in the UK, which “held back growth in the period”. The number of light commercial vehicle registrations in the UK is 25 per cent lower than pre-Covid levels, and is rapidly approaching a 10-year low. 

The number of Northgate vehicles on hire in the UK and Ireland fell from 50,900 last year to 49,300 this year. The group managed to offset the dip by raising its prices, but this wasn’t enough to preserve margins in today’s environment. Rental profits fell by 4 per cent to £28.8mn as a result of cost inflation and investment in electric vehicles (EV) infrastructure. 

Van shortages also affected sales figures. Northgate’s UK and Ireland arm sold just 4,900 vehicles in the period, compared with 5,700 the year before, causing disposal profits to fall by 18 per cent to £18.8mn. 

Northgate’s smaller Spanish arm is performing better, with rental profits rising fast. (Management suggested that more left-hand drive vehicles were being manufactured than right-hand drives.) Meanwhile, the group's total fleet grew by 8 per cent in spite of constraints.

However, it is Redde that steals the show. Revenue from claims and services jumped by 32 per in the period, which management attributed to the growth in road traffic and new business wins. With margins remaining relatively steady, underlying Ebit jumped by 27 per cent to £20.4mn.

Management is optimistic about the second half, saying the group’s full-year performance should be “modestly above market expectations”. Moreover, Redde Northgate is certainly attractively priced, with a forward PE ratio of just 7.8. However, vehicle shortages still worry us. Hold. 

Last IC View: Hold, 336p, 6 July 2022