In the last couple of years the stock market has taken an axe to valuations of companies exposed to the building and property sector. The demise of Connaught (LON:CNT) and the well flagged public sector cuts that slashed social housing budgets in two have hit the sector hard. One of the sector minnows that has seen its share price particularly badly affected is Northern Bear Plc (LON:NTBR) which now trades on a forecast p/e of barely over three times earnings on a market cap of just £3.3m. With half year results due in early November, we met with Graham Forrest the group CEO to find out a bit more about the company, their recent difficulties and whether the company presented a turnaround opportunity for contrarians and speculatively minded investors.
A Brief History
Northern Bear floated on AIM in 2006 with the stated goal of being a 'buy and build' consolidator of smaller support services businesses to blue chip and public sector customers in the North of England. The strategy relied on the ability to make acquisitions in an earnings enhancing fashion predominantly with cash and debt financing - a strategy which stalled as vendor valuations became unrealistic and the company struggled with its debt burden through the downturn.
The company acquired 13 well established companies through 2007 and 2008 which included specialists in fire protection, roofing contractors, floor joisters, asbestos removal, plumbing, safety and plant hire - all of which are essential support services to the property sector. The businesses were all well established, cash generative companies with the owners selling to realise equity while for the most part remaining with Northern Bear as managers.
The financial crisis severely impacted some of Northern Bear’s core business sectors including new house builds and the social housing sector. It led to a marked slowdown in trading in the second half of 2008 and early 2009 during which there was a fear that the group would breach their banking covenants. But £6m of new contracts in the second half of 2009 brought renewed optimism and the company managed to renegotiate its banking facilities in December 2009. While revenues as a whole dropped from £41.8m in 2009 to £35m in 2010, and…
