Redde Northgate issues full-year profit upgrade

Motor insurance services company Redde and fleet hire specialist Northgate merged in 2020 to form Redde Northgate (REDD). In some ways, however, the group is still a business of two halves. 

In the six months to 31 October, the claims and services division grew revenue by 26 per cent to £417mn, while underlying operating profit jumped by 29 per cent to £26.3mn. This was driven by increased volumes from existing customers and new contracts, as well as higher prices. Its operating margin stayed steady at 6.3 per cent.

As in previous years, however, the higher-margin vehicle rental business faced headwinds. In the UK and Ireland, the average number of vehicles on hire fell by 7 per cent to 45,900 and management noted that vans are still hard to come by.

“Pockets of light commercial vehicle (LCV) supply have become increasingly available but supply generally remains well below historic levels for right-hand drive vehicles, reflecting the continued limited number of LCV registrations in the UK which are still running at the low point of the past decade,” Redde Northgate concluded.

Second-hand vehicles are still fetching a good price, however, despite “increasing levels of de-fleeting", and the division managed to grow its underlying operating profit by 4.3 per cent to £49.6mn on the back of strong demand for ancillary services.   

The situation in Spain was significantly better. Average vehicles on hire rose by over 4 per cent to 55,500 and rental profits increased by 12 per cent to £28.1mn. Management noted “progressive improvement in the supply of new vehicles” and said its rental margin remained “close to historic highs” at 20 per cent. 

Management has now issued a “modest” profit upgrade for the full year, citing a “healthy pipeline” of work. 

Redde Northgate’s share price has been on a rollercoaster over the past few years, and there is still a lot of uncertainty over the supply of vehicles and the electric vehicle transition. However, we like the fact that demand is robust, margins are stable and headwinds seem to be easing. The share are also very cheap, trading on a forward price/earnings multiple of just 6.8. Buy. 

Last IC View: Buy, 356p, 5 Jul 2023