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Redde Northgate plc

Redde Northgate sees sequential monthly improvements in trading since year-end

Redde Northgate plc (LON:REDD) has announced its preliminary audited results for the 12 months ended 30 April 2020.

Adjusted results   
Year ended 30 April2020
£m
2019
£m
Change
%
Revenue (excluding vehicle sales)585.6517.613.1%
Underlying EBIT74.876.2(1.8%)
Underlying Profit before Tax59.061.1(3.5%)
Underlying Earnings per Share30.8p38.7p(20.6%)
Statutory results   
Total revenue779.3745.54.5%
EBIT29.975.5(60.4%)
Profit before Tax13.560.4(77.7%)
Earnings per Share5.0p38.6p(87.1%)
Other measures   
Net debt575.9436.931.8%
Group net debt (exc IFRS 16 and Redde)459.5436.95.2%
Redde net debt (exc IFRS 16)53.4n/m
IFRS 1663.0n/m
Steady state cash generation186.967.129.5%
Free cash flow121.620.55.5%
ROCE17.0%7.7%(70bps)
Dividend per Share13.1p18.3p(28.4%)

Key highlights

·    Trading was materially impacted by COVID-19 in March and April, reducing FY2020 EBIT by approximately £7m compared to expectations, but since year-end the Group has seen sequential monthly improvements in trading.

·    Merger integration savings of £10.2m annualised run rate have been achieved as at the end of August, 18 months ahead of schedule.  Targets are increased to £12m by the end of FY2021 and £15m by the end of FY2022, an increase of 50% on the original target.

·    A further £3.8m of permanent annualised cost savings have also been achieved to date, giving a total of £14.0m of run rate savings to date.

·    On 4 September 2020 the Group announced the acquisition, by a wholly owned subsidiary, of certain businesses and certain assets of Nationwide Accident Repair Services (“Nationwide”) by way of a purchase from administrators, for up to £16m, further progressing the strategic vision to become the leading supplier of mobility solutions and automotive services. 

·    Final dividend proposed of 6.8p per share (2019: 12.1p) taking the total dividend payable for the year to 13.1p per share (2019: 18.3p). 

Martin Ward, CEO of Redde Northgate, commented:

“The main priority following the Merger of Northgate and Redde in February 2020, was to integrate the businesses, achieve our targeted synergies and capitalise on the new opportunities available to the Combined Group. Despite the COVID-19 lockdown happening within weeks following the Merger, we were able, in the months during lockdown, to execute the majority of our plans and deliver cost synergies and other savings well ahead of schedule and target. Clearly, new priorities took precedence during the lockdown with the main one being to ensure a safe and effective work environment for our employees and safe contact with our customers who required our services. I cannot emphasise how immensely proud I have been of the response from all our colleagues who stepped up to ensure that we could operate as effectively as possible and deliver our services during these very difficult times. Thank you to all.

“COVID-19 also acted as a catalyst to speed up plans on tightening internal controls and procedures, as well as bringing greater scrutiny on capex and costs management spend, which ultimately led to the business generating significant additional cash which continued beyond the year end.

“Our stated aim is to become the leading integrated mobility solutions provider and this will come about under our strategic framework of Focus, Drive and Broaden. We are in the Focus phase which builds the solid foundations for our next phase of delivering growth.  One of the Focus priorities was to bring about a change to the capital model for funding vehicles. This has already commenced with our first transactions, taking several hundred vans on contract hire rather than purchasing outright, and we expect to be able to show the progress of this over time. The benefit of these changes is to lower up-front cash expenditure, which reduces bank debt, and match the timing of monthly operational costs to that of revenues, whilst generating a similar profit margin.  

“Post the lifting of lockdown restrictions, we have seen a good level of run rate recovery in both Northgate UK&I and Northgate Spain which has been better than expected, whilst in Redde there has been a more gradual pickup which has been slower than expected. 

“More recently, on 4 September, we completed the acquisition of certain businesses and certain assets of Nationwide, which ties in with our strategy and vision to become the leading integrated mobility solutions provider, and I welcome our new colleagues to the Group.

“I believe there is significant sustainable compounding growth and resilient value in the combined business which in many ways has emerged stronger following the COVID-19 lockdown.  I am confident that the actions and measures we are taking are already creating value which will be further enhanced as we deliver on our strategic priorities.  The Board is proposing a final dividend of 6.8p to shareholders.”

Full year results summary

·    Trading for the Group was in line with market expectations until the emergence of COVID-19 in late February 2020.  However, trading in March and April was materially impacted, such that underlying EBIT, underlying PBT and underlying EPS were 1.8%, 3.5% and 20.6% lower respectively, and ROCE was 70bps lower at 7.0% (2019: 7.7%). 

·    Revenue (excluding vehicle sales) was 13.1% higher than the prior year.  The increase was all attributable to Redde, which is included in revenue following the Merger on 21 February 2020. 

·    Total Group revenue, including vehicle sales, was 4.5% higher, and total revenue from Northgate businesses was 4.5% lower, with hire revenue flat including the impact of off hires during lockdown and vehicle sales revenue lower due to temporary closure of sales sites during lockdown.    

·    Statutory EBIT and statutory PBT were lower than underlying measures due mainly to exceptional costs of £41.8m and £42.3m respectively, of which £18.3m related to Merger expenses and £14.9m related to the impairment of pre-Merger Northgate software intangibles.  

·    There was continued strong net cash inflows with free cash flow of £21.6m (2019: £20.5m) benefitting from lower total net capex of £213.7m (2019: £243.9m) driven by lower fleet growth, offset by exceptional costs paid in the year. Steady state cash generation also remained strong at £86.9m (2019: £67.1m).

·    Net debt closed at £575.9m including IFRS 16, or £512.9m excluding IFRS 16, resulting in headroom to bank facilities of £234m, increasing from pre COVID-19 February 2020 headroom of £200m as a result of the cash and cost measures put in place.  Year-end leverage remained stable at 1.62x (2019: 1.64x).

Focus, Drive and Broaden strategy

·    To achieve the Group’s vision, the Board and management team, who together have a proven track record of delivering strategic initiatives, plan to evolve the strategy of the enlarged Group through three phases:

  • Focus: complete the integration of the two businesses alongside initiation of the delivery of the anticipated cost synergies, development of the enlarged Group’s products and services, and start to leverage the platform to enable revenue growth based on the broader offering;
  • Drive: complete the initiatives around the cost synergies, product and service portfolio and platform, and initiate service diversification into complementary markets alongside exploring further market and geographic growth opportunities; and
  • Broaden: accelerate the service diversification and exploration of market and geographic growth opportunities.

·    We expect the Focus phase to last until April 2021 and are well progressed in that phase, and the Drive and Broaden phases to follow thereafter. 

·    The recent transaction with Nationwide is an example of a Broaden initiative, but was accelerated due to the timing of the Administration.  

Merger integration and synergies

·    A new Group Management team appointed for the UK & Ireland businesses shortly after the Merger and the experienced Northgate Spain leadership team continue to manage the Spanish business.  An Integration Management Office has been set up to drive the integration programme.

·    The Group has carried out a detailed review of the operations of both businesses to assess how they can work most effectively and efficiently together. This review underpins the integration programme and is designed to minimise disruption to customers and employees while delivering the expected opportunities and benefits for the enlarged Group’s stakeholders.  It covers all areas, including the Group’s capital and funding model.

·    Excellent progress has been made in integrating the two businesses and annual run rate cost synergies achieved to date are £10.2m, with implementation costs of £3.7m, thus achieving our second year target 18 months ahead of schedule.  We are therefore increasing our synergy targets to £12m by end of FY2021 and £15m by end of FY2022.  Implementation costs are expected to remain less than £10m in total.

·    Additionally, in implementing the review, a further £3.8m of permanent annual costs savings have been delivered to date. These permanent savings are not classed as synergies because they are not contingent on the Merger having happened and could have been achieved independently and include the closure of six Van Monster sites.

·    Together a total annual run rate of £14.0m of cost synergies and permanent cost savings have been achieved to the end of August since the Merger in February.

·    Since the Merger the Group has also made good progress in developing its plans for revenue synergies, which have included FMG winning new contracts with three of Northgate’s major customers and, leveraging Redde’s expertise, Northgate preparing to launch a new accident and incident management product later in FY2021.

Trading and COVID-19 impact

·    The Board and management team took decisive actions to put measures in place to protect the welfare of our employees and customers and to mitigate the financial impact of COVID-19 on the Group. These proactive measures included new guidelines and controls to enable social distancing, furloughing employees, limiting new fleet capex, voluntary pay reductions across Board and senior leadership positions and cost control measures including freezing of recruitment and pay reviews.

·    The revenues and profits of all three businesses were impacted by COVID-19 in March and April.  These impacts led to a reduction in FY2020 PBT of approximately £7m, and included:

  • A comprehensive customer support package, leading to a temporary reduction in revenues of £3-4m per month whilst in place;
  • A reduction in vehicles on hire (“VOH”) with net vehicles returned to branches from lockdown up until the end of April of 6% in Northgate UK&I and 7% in Northgate Spain;
  • Lower volumes of vehicle sales from the temporary closure of disposal markets;
  • Lower volumes of accidents and incidents in the Redde businesses; and
  • Proactive cost measures, including those detailed above.

·    In the first four months of FY2021 performance indicators across the Group have fully recovered or substantially improved, including:

  • Customer support packages, which have reduced to a minimal level;
  • A recovery in VOH, such that VOH in Northgate UK&I is now marginally below pre-COVID levels and Northgate Spain is broadly in line with pre-COVID levels;
  • The re-opening of vehicle disposal channels over the course of May such that they were fully operational from June, with recent significant improvement in residual values compared to prior year driven by buoyant market pricing;
  • Accident and incident volumes have started to increase as traffic volumes pick up; and
  • A reduction in furloughed colleagues.

·    The Board is pleased with the performance since year-end and, whilst significant uncertainties remain given the current economic environment and risks of future lockdowns, the Board is confident of the vision and strategy of the Group and the opportunities created by the Merger and is cautiously optimistic on performance for the remainder of FY2021.

·    As such, the Board confirms, absent a deeper or more prolonged impact of COVID-19 than currently expected, it is comfortable with the consensus of FY2021 analyst forecasts that have been updated since April 2020.

GAAP reconciliation and glossary of terms

Throughout this document we refer to underlying results and measures; the underlying measures allow management and other stakeholders to better compare the performance of the Group between the current and prior period without the effects of one-off or non-operational items.  Underlying measures exclude certain one-off items such as those arising from restructuring activities and recurring non-operational items. Specifically, we refer to disposal profit(s). This is a non-GAAP measure used to describe the adjustment in depreciation charge made in the year for vehicles sold at an amount different to their net book value at the date of sale (net of attributable selling costs).

A reconciliation of GAAP to Non-GAAP underlying measures and a glossary of terms used in this document are outlined below the financial review.

Interim Results

The Group will provide an interim result update for the six months to 31 October 2020 in early December 2020.

Analyst Briefing

There will be a presentation for sell-side analysts at 9.30 a.m. today.  If you are interested in attending, please email Buchanan on reddenorthgate@buchanan.uk.com.

This presentation will also be made available via a link on the Company’s web-site www.reddenorthgate.com  

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.