Northgate beats forecasts but investors cautious over depreciation unwinding

Shares in commercial vehicle hire group Northgate slid 7% on Tuesday morning despite preliminary results that came in ahead of market expectations.

Investor caution was due to currency headwinds and the future unwinding of vehicle depreciation charges over the next three years.

On revenues up 7% to £614.3m in the year to 30 April, underlying operating profit gained 35% on the previous year to £97.8m, helped by an £11.4m benefit from a change in vehicle depreciation rates and a £2.6m adverse effect from the weakening euro

Excluding the impact of the change in depreciation rates operating profits grew 19%, or 23% if excluding both depreciation and forex.

But the unwinding of depreciation rates will see a £5.9m operating profit hit in the new financial year, £10.3m in 2017 and £13m in 2018.

Profits before tax were 62% higher at £83.0m, with underlying basic earnings per share increased 45% to 51.0p and the dividend was raised by the same degree to 14.5p.

An increased focus on small and medium (SME) customers rather than national accounts, leading to lower mileage and fewer repairs, together with the increasing proportion of sales through retail outlets (31% in the UK and 16% in Spain) has helped improve residual values and capture more profits on disposal.

Utilisation rates in the UK and Spain were essentially flat at 88% and 91% but tight cost control has meant that maintenance costs have risen by only 2% versus fleet growth of 8%.

In the UK eight new sites have been opened and new vehicle sales channels have been introduced, including Van Monster, which has helped to improve returns.

Providing an outlook statement, management said it was encouraged that trading from new sites in the UK was in line with initial plans and that "significant progress" was being made in these new vehicle sales channels, with current trading across the group said to be in line with expectations.

Broker Numis was impressed with the performance in the face of the forex headwinds but said: "However, the unwinding of the depreciation changes over the next three years and FX pose significant headwinds and create a flattish outlook for reported PBT".