MIDAS SHARE TIPS: Roads firm Redde Northgate is motoring

There are around 2.6 million road accidents in the UK each year. Most are relatively minor. Some are life changing. Virtually everyone needs maintenance, from roadside recovery to repair work to spare vehicles. Rede Northgate provides all these services and more.

With clients including insurers, leasing firms and large companies, it is contracted to handle accident claims for 20 million UK drivers, around half the country’s motorists.

The group also owns more than 130,000 vans and company cars here and in Spain, making it one of the largest operators in the field, with customers ranging from Tesco to local contractors and delivery drivers.

The business was formed in February 2020 when accident services firm Redde merged with van leasing specialist Northgate. The idea behind the deal was to create a company that could make life easier – and cheaper – for anyone driving, leasing or insuring cars and vans.

So it proved. The business won customers, delivered growing profits and paid generous dividends to shareholders. Yet shares in Redde Northgate have lost a quarter of their value this year, trading at just £3.17. The decline is undeserved and must be reversed as CEO Martin Ward proves his mettle.

Prior to the merger, Northgate had shaky results, criticized for chasing growth over profit and relying too heavily on certain sectors, such as construction. Ward came from Redde, a smaller business, but one that seemed better able to withstand economic ups and downs. While many engagements fail, this one delivered on everything it promised and more.

Both businesses had car fleets. The combination meant they had more to offer and could appeal to a larger clientele. The merger also created a significant increase in car and van depots and repair shops. This means that replacement vehicles can be secured more quickly and accidents can be rectified more quickly, increasing the group’s appeal to insurers and fleet owners alike. Scale also allows Redde Northgate to offer better rental and repair deals than smaller operators, a feature that is particularly attractive in today’s inflationary environment.

The combined size also gave Ward access to more vehicles, which is useful at a time when production of new cars and vans remains tight, particularly in the UK. Backed by these advantages, Redde Northgate has reduced costs, increased profit margins, added new customers and offered more services to existing customers.

The firm has also expanded its fleet and made some shrewd acquisitions, such as Fridge Express, which provides temperature-controlled vans to food businesses and pharmaceutical companies, and ChargedEV, which provides electric vehicle charging points for homes and businesses.

The group also helps remove vehicles after motorway crashes, it is contracted by the police and National Highways to arrive on scene and clear the roads quickly and safely.

The range of businesses and activities demonstrate Ward’s determination to transform Redde Northgate into a diverse and sustainable business capable of developing and growing even in a difficult economic climate.

The latest results bode well, with sales up 22% to £1.5bn, profits up 10% to £166m and a 14% increase in the dividend to 24p in the year to 30 April 2023. Last month’s trading report was upbeat set, with Ward taking confidence from growing momentum across the group and a rich portfolio of new business.

Brokers are also optimistic, although they believe that earnings may remain static for some time.

Redde Northgate sells vans when leases come up for renewal. The shortage of new vehicles has artificially inflated prices, and this source of revenue is expected to decline as supplies normalize. But the group’s annual sales are expected to exceed £1.8bn by 2026, with the dividend rising to 25p next year and rising steadily thereafter.

Ward is also ambitious, hoping to achieve a turnover of £5bn in the next five years as the company grows here and in Spain. More acquisitions are on the way as Ward and CFO Philip Vincent aim to turn Redde Northgate into a one-stop shop for business and insurance companies.

The Judgment of Midas: Ward and Vincent spent £260,000 of their own money buying shares last month. Their decision makes sense. At £3.17, Redde Northgate shares are trading more like a distressed stock than a business in growth mode. This is undeserved and needs to change as Ward takes the firm forward and investors gain confidence in his ability to deliver. Redde Northgate, meanwhile, offers a dividend yield of more than 7 percent. It’s time to buy.

Traded on: Main market Ticker: RED Contact: reddenorthgate.com or 01325 467558