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Too early to pass judgement on Redde Northgate merger

It posted a strong set of results, but the transition to EVs creates some uncertainty.
July 7, 2021
  • Operating profit increases by 46.8 per cent to £109.8m.
  • 2030 ban on sale of internal combustion engines creates uncertainty on value of vehicles

The shifting landscape of Covid-19 and the transition to electric vehicles (EVs) has made it difficult to pass judgement on the Redde Northgate (REDD) merger. Its results today were promising with the FY2022 merger savings targets of £15m achieved 10 months ahead of schedule. This reflects well on the management team that had to oversee this programme, despite the pandemic forcing many of the employees out of the office.

These savings helped the group increase underlying operating profit by 46.8 per cent to £109.8m. This contributed to a free cash flow increase from £10.1m to £97.8m, part of which was used to lower its net debt by 14.6 per cent. It should be noted this extra free cash was helped by the reduction in net capex from £225.2m to £143.1m. Numis expects capex to return to its pre-pandemic level next year but sees the company’s ability to de-gear in a downturn as a positive.  

Analysts are expecting adjusted EPS of 35.88p for the year ending April 2022, up from 31p in FY2021, according to FactSet consensus estimates.

One thing conspicuously absent from the results is the mention of regulation risk around diesel and petrol engines. The UK is banning the sale or lease of new internal combustion engines from 2030. Redde Northgate currently only has 2,300 electric and hybrid vehicles in its fleet of over 100,000. However, it is not too worried about the cost of transitioning to more expensive EVs because it believes it will be able to pass the cost onto to the customer and believes there will still be demand for its diesel vehicles when it re-sells them.

Despite the Redde Northgate’s confidence, fleet software company FleetCheck recently said its customers had fears over the bans impact on the residual value of internal combustion vehicles. Hold.

Last IC View: Hold, 220p, 16 Sep 2020

REDDE NORTHGATE (REDD)  
ORD PRICE:405pMARKET VALUE:£ 994m
TOUCH:404-406p12-MONTH HIGH:415pLOW: 155p
DIVIDEND YIELD:3.8%PE RATIO:15
NET ASSET VALUE:370p*NET DEBT:

58%

Year to 30 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20170.6772.245.717.3
20180.7052.732.417.7
20190.7560.438.618.3
20200.7813.55.013.1
20211.1167.226.615.4
% change+42+398+432+18
Ex-div:02 Sep   
Payment:24 Sep   
*Includes intagible assets of £285m or 116p a share