Redde Northgate (LON:REDD): A Classic Value Opportunity?

25th Oct '22 by Roland Head

4 comments 2043 reads

With a new Prime Minister in place and perhaps some semblance of stability returning to financial markets, I’ve been hunting through the StockRanks for potential contrarian buys. In other words, stocks with high quality and value ranks, but lower momentum scores.

You can find a list of high QV Rank stocks here.

One company that’s caught my eye is Redde Northgate (LON:REDD) - the FTSE 250 vehicle hire and accident repair group.

Y1gmG5cleGO7NdnUQb7j7k-tHiF8jf9wSwN-xKwGrBUFv1OJjP3nMxjNKEM6hJUJngTnJ6YVH4SpAbLFFxQFIaWPPjtDdqb3DfaI8JfvbF4nrCYvl1KF2HM_153dhxT_Ja_xLg1fqHXdc00B4rQ_67aCg4-UHLnoTumTvNAkB_qPysoYR8Oxd991OQ

Redde’s share price has fallen sharply this year:

PqHqb9Hb7iGilhW2ctQ_MukeZJS7qgEhLd1Fc6MHUMpn32XeSV7LXpiI9d-m6hh6-G_LuYbEoDLkYnDl6dM45UxlhBH-8PNjvwN22L_XRoEX6LBNnQQD0owamBZzwdEkELYYqxJaAVyRQq8RftOuyi8lRLyw6OFGjBeSAEKSZ56GuQhwWwuLK0tBKg

This slump has left the stock looking potentially cheap, with a dividend yield that’s slightly higher than its P/E ratio. As Paul commented in September, this combination is a rare find these days, especially with rising earnings.

z3Oyf0CFFfj-hz0nWKi-z23U-b-01nAY9nHsQr_5tcJb-arW4umsILHyglwcZVUaQpUmhChkszd-oibeeNFVEzyCO0t3yY9yP2b6BulBw6J_kgpuBwA9FYYAFrGUkSKokdkaNrJorD8S8kO3GYiatK6rlHy05s7w2r9Ku-8miPcnI8sqL2zdzMwWoQ

As it happens, I already own Redde Northgate shares in my rules-based SIF folio. But in truth, I’ve never had a very strong conviction about this business. However, I’m starting to think that a more optimistic view may be justified.

A positive mix

Redde Northgate was formed in early 2020 when van hire specialist Northgate merged with accident management group Redde.

Northgate has been a beneficiary of the broader market shift from vehicle ownership to rental. By leasing their van fleets, operators can offload responsibility for many non-core activities. Leasing or rental may also reduce balance sheet debt.

Today, Northgate owns or leases around 126,000 vehicles and supports a further 600,000 managed vehicles in the UK, Ireland and Spain.

Redde’s focus is on providing accident management, fleet management, repair and legal services to UK insurers and fleet operators.

Northgate is much larger and more profitable than Redde:

FY22 (y/e 30 April)	Northgate UK&I	Northgate Spain	Redde
Underlying op. profit	£98.0m	£43.9m	£35.6m
Underlying op. margin	21%	17%	7%

Source: REDD FY22 results

However, I’m starting to think that in addition to creating cross-selling opportunities, the addition of Redde has given the business a more defensive profile.

Hire demand from some sectors might ease during a recession. But I’d imagine that with clients such as Tesco and Admiral, demand for accident management and repair services might be more consistent.

According to the company’s most recent update, demand for claims management and repair services has rebounded as traffic levels have returned to normal. Management say they’ve seen little sign of any impact…

Unlock with Email

Unlock with Google

Already have an account?
Login here

FREng

25th Oct '22

Thanks, Roland. Certainly worth more research.

Why are you posting as Megan Boxall?

Bronstein

26th Oct '22

Pleased to read this affirmation for one of my holdings. Accepting there is cyclicality risk here, as someone who likes to buy and try to forget, the long term theme that keeps me in on this one is greater van use in the digital economy. Also mindful of electrification coming where I believe Redde are making all the right preparations.

Harry Hindsight

30th Oct '22

At least its not Eddie Izzard the next leader of the labour party :).

Redde Northgate (LON:REDD) is in my newly made 'UK Adventurous Super Stocks' screen constructed following Ed's old webinar on the meanings of Risk Ratings and Styles. Fed up scrolling through many many watchlists etc and now trying out the system as it was designed and reduce workload.

Dropped REDD on falling 50dma so simples for me look at it again when breaks up but think 350 a good target imo - no rockets but maybe an entry point. Buy outs - have no clue still waiting on Vertu Motors (LON:VTU)

Tortoise investor

20th Nov '22

Thanks for the helpful article Roland.

A couple of other things worth noting about Redde Northgate (LON:REDD):

About a fifth of Northgate customers are in construction. So it has some exposure to the cyclical economy but that figure was much higher in the 08-09 crash when the shares did badly (I think those memories are partly not helping the current share price).
Northgate rental margins have been high recently due to shortage of availability of vans plus higher demand.
Further, it has benefited from second hand vehicle sales prices which have allowed high disposal profits (second hand car sale prices have come down a lot recently - I assume the same for vans but don't know for sure).
So I think it helps to think about £REDD's longer-term profitability if rental margins and van disposal prices reduced to more historic averages. I imagine this is to some extent reflected in future years broker forecasts which show a softening in profitability. But for my own purposes I work to about c.40p EPS in a "normal" year (which is guesswork I stress) which might soften further during a recession. Given we are now in a recession, maybe the current share price isn't quite so cheap.

I own Redde Northgate (LON:REDD) for reasons you set out Roland but think helpful to also note the few bear points above for balance.

Redde Northgate (LON:REDD): a classic value opportunity?

A positive mix

Unlock the rest of this article with a 14 day trial

About the Author

Roland Head

4 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...