brand, which was still growing very strongly as the pandemic hit. Meanwhile, the group’s remaining rural and suburban pubs will become more structurally robust, should the current shift to greater working from home become more permanent. The second strand of our investment case is built on the fact that recent events have triggered the loss of around 30- 35% of existing capacity across the casual dining sector. Whilst we acknowledge that the barriers to entry in the industry are low, we foresee a period of several years during which the number of outlets will remain below its previous level. The operators that can continue to trade during this period will therefore disproportionately benefit from a backdrop of pent-up demand from consumers who have been unable to dine out for almost a year and have healthy levels of “forced” savings. In that context, the £175m equity raising round, announced on 10th March, seems sensible and will help the group to reduce its net debt position from a current level of around £400million whilst rapidly reducing leverage below two times earnings before interest, tax, depreciation and amortisation (EBITDA). Overall, our case for investing here is not built solely on a vaccine-enabled rebound for the UK dining market. Having undergone a fundamental restructuring, the core of this business is now solid enough to support a better rating. Further, falling competitive capacity should help to drive earnings ahead of expectations as the economy unlocks.
Redde Northgate – driving profit Redde Northgate is a mobility services business. It was created via the allshare merger of Northgate, a light commercial vehicle hire operation that contributed about 60% of combined group EBIT at the time, and Redde, a credit hire and repair
PERSONAL VIEW
firm that accounted for the remaining 40%. The rationale was that the two businesses, each with large vehicle fleets, offered multiple touch points into the transportation industry. In combination, they could wield stronger buying power with original equipment manufacturers (OEMs), boost fleet utilisation and create significant operational synergies. The characteristics of the combined group can be likened to those of EnterpriseRent-A-Car. Best known for its light vehicle rental business, it is also a significant credit hire player, and a major competitor on the Redde side of the business. In common with other companies involved in transportation, the business suffered during the first lockdown. As restrictions were eased, however, Northgate’s fortunes improved such that, when it last reported, the firm was trading ahead of pre-Covid levels in the UK, Ireland and Spain. Having seen no discernible impact from the second lockdown we are hopeful about the impact of the third, as this division has benefitted from strong residuals in the UK light commercial vehicles market. These have helped to drive substantial returns and cashflows from disposals. The Redde Division, on the other hand, has been slower to recover. As the first UK lockdown was lifted, trading improved to reach around 20% below normal volumes in September. However, as restrictions were reimposed, activity fell to 30% below the monthly average for October and subsequently weakened further in November. With trading at reduced levels, management have continued to review costs and kept a proportion of the workforce in the UK Government’s furlough scheme. We understand, however, that the firm is participating in three live tenders with major insurers across both credit hire and repair services, so they will be keen not to cut too many more costs until the outcome is clear.
S P E C I A L S I T U AT I O N S
Redde is fundamentally a very profitable business, that generates a run rate EBIT of £4m per month based upon pre-Covid trade volumes. Yet, the market seems to be assuming that much of this contribution will evaporate. We believe that a surge in activity as the UK vaccine roll out progresses, alongside the scope for some large tender wins that will drive market share, could result in material upgrades to earnings expectations in the 2022 financial year. Meanwhile, although the significant synergies that have flowed from the merger have not been totally ignored by the market, we also believe that they have not been fully appreciated. In particular, we are excited by the expanded service proposition that the combined group can offer. It appears that the management team has been able to pitch for, and win, the sorts of major project that the two businesses could not have secured in isolation (for example in the e-commerce space, possibly with the likes of Amazon). The ability to hold down this type of larger contract that offers a greater service component and the ability to create true “turnkey” mobility solutions, should boost the quality of earnings and margins whilst reducing capital intensity. Given that, at the time of writing, the shares only trade on around eight times 2022 earnings, with a 6% dividend yield, we continue to see significant upside. ●
Winning ways Mike Savage and Peter Bate manage around £130m in their discretionary segregated service that focuses on UK smaller companies. We are delighted to let our clients know that Mike Savage has made the shortlist for the Fund Manager of the Year at the prestigious 2021 PLC Awards. For further details, please speak to your Investment Manager.
Spring 2021 — 21
