Van hire specialist Northgate plc (LON:NTG) has increased the size of its hire fleet by 2,900 to 52,800 since April — a 5.8% increase. The company reported its half-year results today, and said that the number of vehicles on hire had increased by 2,800 since the end of April, while its pre-tax profits had risen by 12% to £27.4m, continuing a trend I highlighted earlier this year.
Perhaps more impressively, Darlington-based Northgate also reported an increase of 1,200 vehicles on hire in Spain, suggesting that Spain’s economy may be showing signs of life, or perhaps that competition from smaller companies has weakened due to the country’s prolonged recession.
Falling profit margins
However, although Northgate’s growth is encouraging, investors may want to pay attention to its profitability. The firm’s operating margin has fallen from 24.4% to 18.7% over the last year, while its return on capital employed fell to 12.5%, down from 14.8% in April 2013.
Northgate says that the fall in profitability was expected, due to reduced levels of used vehicle sales and investment in new UK sites, from which 1,10 new cars and vans are now on hire, including 900 acquired during the last six months.
However, Northgate’s fleet expansion has come at the cost of a 2% increase in net debt, which rose to £370.4m, although the firm’s growth means that the increased value of its fleet has outpaced the increase in its debt levels, and net gearing fell from 102% at the end of April to 100% at the end of October.
Although Northgate’s growth strategy makes sense, I wonder if it’s proceeding too fast — Northgate says it is planning to open at least 20 new sites over the next three years, but if I was a shareholder I would want to see Northgate’s rather high gearing come down a bit more over the next six months, in case financing costs and interest rates rise over the next few years.
Northgate has opened two new car and van hire locations over the last six months (Slough and Basildon), with a further site in Charlton due to open shortly and two further sites in the London area due to open before April 2014.