Northgate cautions on Brexit as it reports full year results

Light commercial vehicle hire company Northgate’s annual profits were boosted by an increase in demand in Spain against a “mixed trading backdrop” but cautioned on the potential effect of Brexit on the business.

Northgate’s underlying profits before tax fell 2.47% to £82.9m for the year ended 30 April 2016. This included £3.7m in adverse impact from previous changes in vehicle depreciation rates and £1.7m in adverse effect of the weakened Euro across the year. But adjusting for these factors, the company’s underlying profit before tax increased by £3.3m.

The Darlington headquartered company’s underlying basic earnings per share fell 4% to 51p.

There was reduction in net debt by 8% to £309.9m, which included £42.8m net cash generation post dividends and £161m from the adverse effect of the strengthened euro at the balance sheet date.

Northgate declared a 10% decrease in dividend per share to 16p.

The Spain division of the company outperformed the UK division with demand, as the unit reported an underlying operating profit of £41.3m, up from £33.3m in 2015, which includes a £2.3m benefit from previous changes in vehicle depreciation rates.

Customer numbers in Spain increased by 16% during the year and the average hire revenue per vehicle increased by 1% compared to the previous year.

There was lower demand in the UK than in Spain as the average number of vehicles on hire in the UK was 47,200, a 3% decrease compared to the previous year.

During the past six months the company recruited a new UK senior management team and structured it in a similar way to the Spanish team. A group executive committee was also formed which included senior management from both the UK and Spain.

Chief executive Bob Contreras said: "We are pleased to be delivering results in line with expectations, against a mixed trading backdrop with a reduction in the number of UK vehicles on hire being offset by a more encouraging result in Spain where we have seen an increase in our core flexible hire business and an improvement in the residual values of used vehicles sold.

However the group warned that the UK's decision to leave the EU could "potentially cause a downturn in the economies in which we operate". The company said an adverse change in macro-economic conditions could also hurt its customers and increase bad debts.

"In the short term, foreign exchange volatility, credit risk and availability of capital may be affected by the decision for the UK to leave the EU. In the longer term, demand for our products and the cost of our supplies may be impacted."

However, Northgate said that its current hedging arrangements protect it from material foreign exchange risks and it has sufficient borrowing facilities in place to fund its activities with maturities up to seven years.

Contreras added: “We have confidence in the steps we have taken to strengthen our management team in the UK and, whilst it will take some time to translate into results, we have put in place a range of operational and commercial initiatives which will improve both the quality of the business and our financial performance over the medium term. Therefore we expect that the current financial year will be more heavily weighted towards strength in the second half.”

Numis said the full year pre-tax profit, EPS and dividend were slightly ahead of its expectations. The broker said Spain continued its strong momentum, offsetting softness in the UK.

"Management has made a number of changes to its UK business (particularly in sales), the benefit of which is expected to be evident in in the second half of 2017. We are lowering our 2017-18 EPS forecasts by 6-7% (using management's assumption of €1.30 :£1; a 1% move is worth £0.4m to pre-tax profit), and price target to 500p (previously 560p) but retain our 'buy'."

Shares rose 4.98% to 321.75p at 1037 BST.