Redde in reverse gear

The recent trading brings back dark memories of when the company traded under the name of Helphire and saw its shares reach nearly 3,000p in 2007 before crashing when the company drove into a wall of borrowings and uncollected cash. Redde shows nothing like the balance sheet strain it did back then, yet the trends that have powered an impressive recovery since the nadir appear to have gone into reverse.

Most of the group's business involves providing hire cars and repair work to drivers, and invoicing either their insurer or the insurer of the at-fault party. The group's recovery has been built on investment in technology that has helped improve the efficiency of its service and sped up payment of its invoices. It has also sought to build stronger relationships with insurers based on protocol agreements whereby it offers a discount in exchange for quicker payment. Coupled with margin improvement, the reduction in its significant working capital requirements has helped the group pay out 61.3p a share in dividends since payments were reinstated in mid-2013.

But the graph below charts the movement over the past decade in number of days it takes Redde to get paid along with operating margins. As can be seen, impressive progress was made up to 2017, but since then debtor days have jumped from 91 to 116, which has sucked up working capital and contributed to an increase in net debt from £9.7m to £34.7m over the two years.

In the group's 2018 results, it pointed to the potential for slower payment to lead to low discounts and higher margins, but 2019 operating margins actually dropped from 8.8 per cent to 8.4 per cent. Once again, in the 2019 results Redde alluded to the potential for margins to increase based on particularly slow payments from one big insurer. The company also prepared shareholders for a tussle with its powerful customers, stating: "If the group has to sacrifice some debtor days to preserve value, then it will do so." Given the recent big contract loss and the presence of large competitors in the UK market, such as Enterprise, a battle for quicker payment and margin preservation could prove drawn out.

A large stock overhang is providing investors with reason to be nervous. BlackRock has been tasked with liquidating the holdings of former Woodford funds, which includes a 19.5 per cent stake in Redde. Invesco, a 25 per cent holder, has also been selling. Meanwhile, the sky-high level of the shares' historical and forecast dividend yield suggests the market is preparing itself for a dividend cut given the working capital outflows.