Wednesday, December 2, 2015

Northgate Plc - Vehicle Rentals

I have both owned and written about this company in the past. It was then a good company with a bad balance sheet; it is now a good company with a good balance sheet.


The apparent cause of the recent decline in share price is the margin deterioration highlighted above. Management has explained the margin decline as attributable to 15 (now 16) new sites in the UK that take time to ramp up -- there are start up costs and vehicles are introduced slowly but steadily as each site matures. This is not an after-the-fact excuse; I owned the stock and was paying attention in 2012/3 when Bob Contreras explained that this was in the offing. 

From the section labeled "network" in the latest interim filing we can surmise the following, more or less:


So that 



And this before a proper recovery in Spain, its other market.

In any case, a 12,5x multiple on 2017 earnings would not surprise and it seems to me that, along with dividends collected along the way, these shares offer a 100%  return.

Disclosure: No position (yet)

34 comments:

  1. No surprise this is back on our collective radar!

    One thing to note - and I haven't completely modelled it out yet - is the impact of their depreciation changes on their book of vehicles. The mechanics of this at the moment aren't entirely clear as we're still 'in the middle' of the IS/BS adjusting to the change.. but I do know the sell-side find Northgate a bit of a conundrum as a result of the historic large disposal profits, and it continues to attract some discount as a result of that. Given the speed with which they turn over their vehicles, it shouldn't take too long for the more appropriate accounting treatment to work through.

    The fact they issued E100MM of 2.38% seven year debt and improved the terms on the rest is a positive. There is still a clear perception difference between debt and equity holders.

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  2. Well I hope there's more downside to come

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  3. interesting piece on Macau money laundering:
    http://origin.www.uscc.gov/sites/default/files/Annual_Report/Chapters/Chapter%203%3B%20Section%203%20Macau%20and%20Hong%20Kong.pdf

    From the VIC short write up on wynn

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  4. When is the writeup on ATP Satellite Holdings coming? Involved with Intelsat at the moment and want to compare notes on spacejunk

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    1. Meh, I'm not going to write up APT. My small stake in it is predicated on a number of guesses (e.g. asset drop downs and SOE reform) that are company specific and not applicable to Intelsat

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  5. http://webb-site.com/dbpub/

    Interesting site if you invest in hong kong companies. All the info about insider dealings and news messages in one. Plus info on potential shadiness and insiders.

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  6. Thx - I visit that site every couple of weeks to keep up with the neighborhood gossip

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  7. Red, how sustainable is the low capex for crestwood? Since the maintenance capex is only a fraction of depreciation. It seems crazy cheap if that is sustainable. Is this a regular occurrence that midstream assets need very little capex once they are built? Even for KMI sustaining capex was 1/4 of depreciation in 2014.

    thanks.

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  8. Good question, thanks.

    I think long-term maintenance capex requirement for something like CEQP should run at around 20% to 25% of EBITDA (or 5% of revenue) so that my estimate of FCF as understood in the industrials space is currently in the neighbourhood of $4 to $5 per unit.

    The important thing, though, is to focus on whether everyone -- GP, LPs, managers -- are facing in the same direction. In the case of CEQP there are no comical incentive distribution rights so we can surmise, I think, that their breakouts of capex into maintenance and growth categories are not designed to deceive. The size of the recent unit purchases by the sponsor also indicate that it is more likely than not that the mcx estimates approximate reality, imo.

    MLPs with IDRs, otoh, look very much like long cons & I wouldn't touch them as long as there are better structured MLPs trading at improbable yields.

    (I wouldn't compa

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    1. Have you thought about the debt on CEQP? 15-17% YTM. Curious how you evaluate the debt vs. equity in this situation?

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    2. I have. Simplistically, the bonds are a bet on the quality of the assets & the equity is a bet on whether management & sponsor know what they're doing. So I wonder whether (1) management has less than 3 months visibility on revenues & EBITDA; (2) whether there is some reason why they can't cut/eliminate the distribution in case of need. If they eliminate the cash distribution for a year and buy back shares at $20 instead they'd save $100M/year in cash outflows which must, I think, be greater than the EBITDA sensitivity embedded in the business over a 2 to 3 year time frame. If they have some visibility ( I think they do) and if they have some judgment (I hope they do) then the equity will do well. Would I buy the equity for a client account if I managed money? No, because I have seen too many managements (including owner operators with their entire net worth at stake) foresake the path of least resistance for the thorny path to death and destruction. But for my own account I like the set up well enough that a sub 3% position with 8-1 payoff potential that becomes a 9-1, 8-1 etc payoff potential with every passing quarter seems attractive. Obviously if I though that the long-term clearing price of crude/gas is sub$30/$2 then the idea wouldn't appeal to me at all.

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  9. Hi red - unrelated comment here but wondering if you hold some % of portfolio in cash - would you ever put it to work in something like PCP? A mid single digit annualized return but risk of breakup very low as well.

    Low risk given Buffett's track record, plus all cash, board approval...just waiting on regulators. Even if it doesn't get approval, you have Buffett's seal of approval and will do fine long term.

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  10. I take it that this is related to note on seeking alpha? Upside = 1.5%, downside -10% to -15%. Not my cup of tea even if the opportunity cost of having the cash tied up were zero.

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  11. Red, thoughts on Eqstra? It seems to be 85% non mining related equipment rental (mostly passenger cars, trucks and forklifts) and logistics business that potentially trades at 1-2x earnings. Some insider buying as well. The more I study it the more i'm convinced it is crazy cheap. Or maybe missing something here? The only downside I can see now is that a lot of their business is in South Africa. Seems to be thrown out with the bathwater due to their mining business attached to it, or is that not the full picture? Just a heads up in case you missed the VIC write up. Would love to hear thoughts on it if you looked at it.

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    1. Very cheap stock even with Rand FX headwind

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  12. ps everything in RSA is commodity related in the end (not just via currency depreciation) so if you are already exposed to commodities it may be worth thinking about substituting this for that rather than adding to your gross exposure.

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  13. 5-10% of SA economy is mining. But because of ripple effect probably bigger. But seems reasonably diversified? Also they just won a large order in their mining segment, so a order book of 16b vs revenue of 4b in the past year. So even that segment is not doing so bad and will be reasonably secure in the next few years.

    Im struggling to see how it can be so cheap, other SA equities did not fall nearly as much. This stock really screens well, and within 20min of reading their AR it is clear that direct commodity exposure is limited? Why is no one bidding this up? Always a bit hesitant on seemingly cheap stock that easily show up on screens.

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  14. Well all of Eqstra's business lines are in cyclical verticals and the RSA's economy cycles up and down with the ebbs and flows of the mining sector. The official share of GDP may be small but the multiplier effects are large, just as in Brazil for example. It may be that Eqstra has fallen harder than the index for just that reason, at least in part. (The larger stocks on the JSE include continent-wide mass retailers and FMCG businesses that will only really weaken in a panic).

    Not trying to talk you out of it, obviously. I think Eqstra is good value for money. I do think that the market has thrown this one out with the bathwater. But you should know that a country like RSA (tragic governance; structural unemployment; violence; demographic, ethnic and social fractures) can come apart at the seams in a prolonged commodity downturn.

    Long-winded way of saying "very cheap but not mindblowingly cheap". The definition of mindblowingly cheap, as far as I'm concerned, is the that you can see when, where and how you're getting your money back and the cash return is greater than any hurdle rate you could state with a straight face. In those situations it doesn't matter what the market (or I) think. It doesn't matter if it is bid up. You are delighted if it never, ever gets bid up. Etc You see what I mean.

    There are probably weeks and months to get intimate with this stock before having to decide which it is -- cheap ormindblowingly cheap -- so you and I don't have to resolve that question today.

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  15. Hi Red,

    Maybe you have an error in your pretax gain 2015 (tracking portfolio). Adding up all your gains ($US) I don´t obtain -7.352. I am not sure, maybe I´m in an error.

    Merry Christmas!

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  16. Happy New Year David. I don't think so. There are some dividends and so on in there. I'll lay it all out in a few days just like every year.

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  17. Hi Red,

    https://espacemc.com/en/investment-ideas/microbix-biosystems-inc-mbx-to

    Link about a canadian microcap. Maybe you are interested in.

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  18. Great new re-arrangement of the tracking portfolio page. Thanks a lot and happy new year!

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    1. Happy New Year Andre and thx for sharing your insights over the past year

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  19. Is your view on Harcourt Mifflin essentially the same as the VIC write up from May, i.e., the move to digital is obscuring the real cash flow generation of the business? What is your 2016 catalyst? Is it that cash flow and the accompanying buybacks (juiced by more leverage) will force the market's hand?

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    1. Yah, sort of:

      $2.50/share FCF in 2016

      + demography-driven organic growth for a few years

      minus whatever impact the fall in crude/gas prices will have on school district budgets

      minus market share losses as Pearson gets its act together

      ==> net win for the stock.

      If they buy back shares then it could become a real winner, north of $55.

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  20. Yes, the demographic tailwind is there and this should be an industry with fairly stable market share. I'm a bit concerned about the potential for poor acquisitions aimed at getting into adjacent markets, but I think you're not bearing too much risk of that at these prices.

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    1. Risght. Barring a wobbly broader market I think 12x pro forma FCF should be achievable and then we'll see.

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  21. Hey Red,

    Manage to find an entry to NTG yet? Down a cheeky 60p since post.

    Any thoughts on ITE? Historical results v good, still heavily weighted to Russia and the oil biz though, two situations which I suppose aren't great right now.

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  22. Not yet. instutional investors are worried about Enterprise (via Burnt Tree) competing head on with Northgate so I suspect that one will be able to pick NTG up at below book value soon enough. I'm holding out for 280p or below. No worries if it doesn't get there.

    ITE is a bit of an uphill struggle and yes, it's more or less an O&G "play" so I wonder if something like Lamprell, sitting just above cash, isn't a easier way to gain exposure to a recovery in crude prices.

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  23. Probably not the right thread to ask this question on, but have you looked at/have any interest in U.S. television broadcasters, such as Nexstar? They're levered to the hilt, but the free cash flow yields are very high and there's a huge spread between Nexstar's FCF yield and the yields on their bonds.

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    1. Someone mentioned NXST to me 6 months or so ago.

      Using FCF yield to equity is not helpful when the issue is whether the biz model has terminal value. if I remember correctly, all the comps are trading at EV/EBITDA 7x --> EV/FCF 10x. So half the ENTERPRISE VALUE (and therefore 100% of the value of the equity) is premised on robustness of local TV business model in the years beyond 2025.

      I don't think anyone can confidently adjudicate whether the local TV business model is/isn't as robust in 10 years time as it is today. I don't, however, have any trouble imagining that even very small decline rates in viewing/advertising in the intervening years would wipe out the equity. That's why I'm not surprised at the spread between the yield on the bonds and the yield on the equity.

      So, not for me really.

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    2. Thanks for the thoughts on it.

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  24. 530p = fair value for Northgate post-Brexit, imo.

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