Redde Northgate still moving forwards

Although a revival in the number of accidents filed has been damaging to car insurance companies’ profits over the past year, it has been a driver of growth at Redde Northgate (REDD).

The company reported a 37 per cent increase in revenues in its claims and services business, which provides repairs and replacements when customers make insurance claims. It said there had been a “ramp up” in activity from multi-year insurance deals, many of which were signed last year. 

The Northgate arm of the business, which provides car and van fleets, benefited from the easing of supply chain constraints in the new vehicle market, allowing it to add 4,400 to its now 130,700-strong fleet. Much of this came through growth in its business in Spain where it broadened its supplier base to meet demand. It grew rental revenue at a faster pace (11.9 per cent in constant currency terms) than in the UK & Ireland (up 6.1 per cent), which suffered a slight drag due to a continued shortage of vans – van registrations in the UK were 20 per cent lower in 2023 than in its previous financial year. 

Shortages have eased, but are still a long way from normalising. Although this causes operational headaches, it led to reported profit growth being higher than the 10 per cent growth in underlying numbers as the company booked a one-off credit of £46.5mn to adjust for the higher carrying value of its fleet, given higher used vehicle prices. Although these are now “softening”, they should remain above pre-Covid levels over the medium term, it argued.

Net debt increased by £112mn to £694mn – partly because it spent more than £100mn on dividends and buybacks, as well as £10mn on acquiring traffic management firm Blakedale.

Higher borrowings, and potential fears about a decline in the residual value of its fleet as shortages ease, may explain why the market was unimpressed – the shares fell by 6 per cent in early trading and are priced at under seven times forecast earnings.

Its borrowing costs are low, though, at just 3.1 per cent – almost 40 per cent of its debt is long-term notes that don’t mature for another four years. Cash generation also remains strong at just over £190mn and the company continues to win new business. Given the 6 per cent dividend yield on offer and the fact that the jobs market remains robust, we upgrade to buy.

Last IC View: Hold, 392p, 07 Dec 2022