Northgate top pick in M&A frenzy

Lavendon, Speedy Hire and HSS also in play
Thursday 24 Nov 2016 Author: William Cain

Activist investor fund Crystal Amber has a knack of getting its own way.

Last week publisher Johnston Press (JPG) announced it was considering selling off assets, a move that may have been prompted by stake building from Crystal Amber.

But it is the investor’s 4% holding in van hire outfit Northgate (NTG) which has caught our eye.

NTG - Comparison Line Chart (Rebased to first)777

Crystal Amber’s investment in the UK market leader – which it upped in October 2016 – looks like a valuable ticket to what has become a merger and acquisitions (M&A) frenzy in the equipment hire sector.

M&A action kicks off

The starting gun fired on Tuesday 22 November when two companies in the sector separately announced M&A activity.

Ashtead (AHT), by far the largest London-listed equipment hire group with a market value of £7.2bn, bought Hewden out of administration for £29m.

On the same day Lavendon (LVD), Europe’s biggest provider of aerial platforms, surged 42% after rejecting a 205p a share takeover from Belgium’s Thermote & Vanhalst (TVH) which valued the business at £351m.

Activist investor Toscafund is also pursuing corporate activity in the sector by trying to cajole board members at Speedy Hire (SDY), the UK’s biggest tool rental business, to make a bid for rival HSS Hire (HSS).

Public pressure

Northgate (NTG), while not in direct competition with tool hire sector businesses like Speedy and HSS or heavy equipment plays Ashtead and Lavendon, is already under public pressure from Crystal Amber to sell some or all of its assets.

Private equity investors might see value in the business, in our view, after a long period of debt reduction which saw net debt to earnings before interest, tax, depreciation and amortisation (net debt to EBITDA) hit just 1.3 in the year to 30 April 2016.

Gearing, defined by Northgate as net debt to tangible assets, was 67%, compared to figures as high as 670% in the mid 2000s.

And the stock trades at an enterprise value to EBITDA ratio of just 3.6, according to our calculations.

Partial sale

A partial sale is another option. Northgate’s Spanish unit could prove attractive to a bidder given a pick-up in the economy on the continent. A sale of the Spain business would have the added benefit of allowing management to focus efforts on improving performance in the UK.

While we don’t view a takeover as key to the investment case at Northgate – the business is well run in our view – Crystal Amber’s stake and a buoyant market for deal-making could underpin the share price in the months ahead. Key risks include failure to complete a deal, unexpectedly poor operating performance
and the cyclical nature of van hire in relation to economic activity. (WC)

Northgate  (NTG) 411p

Stop loss: None

Market value: £548m

Prospective PE Apr 2017: 9.0

Dividend yield Apr 2017: 4.1%

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