Having more than doubled in price since June 2012, van hire group Northgate (NTG) has run out of petrol after a disappointing update. The shares have dropped 12.9% to 305p after the £404 million cap says that it is trading at the lower end of the market consensus forecast range. Given the massive rally in the stock in the preceding months, this surprise bad news could be the trigger for investors to abandon Northgate in their masses.
Lower-than-expected demand is the reason behind analyst downgrades for 2014. The number of vehicles on hire continues to fall in the UK. While Northgate has the capacity to resize its fleet according to demand – it has reduced the estate by 1,100 vehicles in the UK since October 2012 – and hire rates have been stable, the underlying drop in demand does not bode well for its UK operations.
Panmure Gordon has a 'sell' rating and 230p price target. It notes that net debt and gearing continue to fall with cash generation and cost control at the core of its strategy. Yet it remains cautious on the stock, particularly because of the massive rally of late.
N+1 Singer is more bullish with a 'buy' rating and said this morning that it expects to increase its price target from 310p to 380p to reflect market re-ratings. It says: 'Management’s restructuring and operational improvements have helped protect profits. The focus is on trying to grow the UK business, generating cash in a challenging Spanish market and implementing initiatives to improve ROCE (return on capital employed.' The broker adds: 'It is taking time for the new UK sales initiatives to deliver results (and the market is not helping), although we retain our view that asset backed de-leverage should generate significant medium term value.'
Peel Hunt wrote in January that 2013 'could prove to be Northgate's year'. It reckoned sales and marketing investment could lead to UK fleet growth, which would be a major catalyst for the share price, so too could a debt refinancing. With the UK fleet growth unlikely in the near term, investors will have to scrabble hard to find a reason to own the stock.
Northgate has a long history of wild rallies – both upwards and downwards. Today's reaction to its trading update would suggest a downward cycle has begun. With full-year results not due to be published until June, Northgate will need to find a reason to update on trading in the interim period, otherwise the stock will remain vulnerable.