I like businesses that acquire other high return on capital firms at low valuations, thereby compounding their returns. If the acquired businesses are small, uncontroversial, and beneficiaries of long-term secular trends, it is a strategy that mirrors my own approach to investment in shares of publicly traded businesses -- and therefore a business model that I can easily understand and appreciate.
That’s one reason why I gravitate toward businesses like Northbridge Industrial Services (“Northbridge”), an acquirer and consolidator of businesses that supply specialist equipment, primarily to the oil and gas industry.
(XPO Logisitics and Judges Scientific, already profiled, are other examples; a similar business, and one that I covet most is Australian, but not yet cheap enough -- especially in USD -- to profile).
In any case, Northbridge’s foundation is Crestich, which claims to be the world’s largest load bank manufacturer and supplier – via lease and purchase. Northbridge acquired Crestich’s principal competitor in the London area – Loadbank Hire Services – in March 2007, a year after its IPO, and acquired Crestich’s principal distributor to the Caspian oil & gas industry – RDS Ltd. – six months later.
Its subsequent strategic moves have sought to expand its geographic and sector footprint: Tyne Technical Equipment Services was established in 2009 to rent and sell generators and associated services in the United Arab Emirates; Tasman Oil Tools Ltd., a thirty year old oil and gas equipment rental business in Western Australia was acquired in 2010; Allied Industrial Resources was set up in mid-2009 in order to supply high power air compressors and dryers to the oil & gas, shipbuilding, construction, and mining industries.
This is what Northbridge looked like at the end of 2011:
It's a small, quality business that acquires even smaller, quality businesses. And, it pays good prices for the businesses that it acquires, as evidenced by the return on incremental investment.
Its value, as-is, with no further growth and a cost of capital of 9% is probably in the neighborhood of 458p, 86% above the current price:
The future portends more value-added growth: Northbridge intends to expand into the continental European, US, Brazilian, Chinese, and Singaporean markets.
Its acquisitions in December 2011 – of the Belgian transformer and switchgear leasing firm DSG Rental NV, and the Singaporean oilfield instrumentation business Loadcell Services – are steps in this direction.
Obviously, these latter acquisitions made no meaningful contribution to Northbridge's profit in 2011: had they been acquired in January, however, they would have contributed 0.99 million in after-tax profit, and 2011 ROIC would have been 24%, raising Northbridge's earning power value by 50p per share.
Northbridge is yielding 14.2%, just another quality British business selling at a distressed price. It reports interims on September 27th.
Disclosure: No position.
Are you calculating return on new invested capital with our without intangibles?ReplyDelete
Thanks for the question.ReplyDelete
I always calculate ROIC without acquired intangibles and I always calculate RONIC with acquired intangibles.
The former tells me the quality of the business as-is, and the latter indicates whether value is being enhanced or degraded in the pursuit of growth.
Firstly, let me say that I greatly enjoy your blog.
I agree with your write-up on NBI and think it's a good long, even (especially?) with recent hiccups in the price post interim announcements, though had a question about how you normalised earnings.
Reported numbers from 2011 annual report (£m):
Revenue of 24.9
Gross profit of 14.7
Selling and distribution costs of (5.5)
Recurring admin costs of (4.3)
Exceptional admin costs of (1.7)
Reported operated profit of 3.1
Your EBIT of 4.84 seems to have the 1.7 (1.688 to be precise) of exceptional admin costs added back in (3.1 of reported operating profit plus 1.7) yet you add the 1.7 of exceptional admin costs again to go from EBIT to adjusted EBIT of 7.38.
This seems to double count the 1.7 of exceptional admin costs. Or am I misunderstanding your normalisation? Apologies if so.
Secondly, do you have an email address I can contact you on? I can't see one on the site or twitter.
You are quite right, I've inadvertently double-counted the 2011 extraordinaries. My apologies and thanks for spotting it. I'll fix the spreadsheet in the morning.ReplyDelete
My email is email@example.com
European operations are still doing well, and the company should remain cash flow positive as it limits new rental capex. So, the recent share price collapse seems overdone, assuming the energy services business rebounds within a few years. If you're still following, do your thoughts differ?ReplyDelete
Tweeted an opinion this morning as it happens. I think Crestchic and the O&G consumables business can support a market cap of 60MM. It's a puzzle piece of acquisitions so unpacking those and the financials in the RNS for each should be more useful than trying to piece the valuation together via the company's segments.ReplyDelete
The bottom continues to fall out of this stock. I couldn't find any news for today's 20% drop. Have you seen anything after the interim results? Is this beginning to interest you?ReplyDelete
Wow. Hadn't bee following the price action. 88p doesn't look right & I'll have to look into it.Delete
Down big again today. Somebody seems to be selling without regard to price. I still haven't seen any recent news.ReplyDelete
Careful -- it could be related to the covenant negototiationsReplyDelete
Yes, I know those negotiations are ongoing. The statements in the interims about them were quite rosy, but it does make sense to be somewhat cautious. But it seems to me that they have a good business in Crestich and the ability to limit capex by not reinvesting in new rental equipment.ReplyDelete
Shocking price move, down 85% in the past 6 months. They just renewed a 17.1m revolving loan and 5.75m facility agreement. The banks obviously had to foresee the business decline when extending the loans, so doesn't the chances seem very very remote they would enforce covenants due to a slowdown? NBI's rental equipment is very new (net PPE:gross PP&E ratio), so they should be able to just let the fleet age, sell of assets, and delever very rapidly. I have them generating 15m in cash by the end of 2016, which is now more than the market cap...ReplyDelete
Would be curious if you see it differently?
I've also pencilled in 15M in FCF over that time frame. I agree with your other insights, too. Not trading at a super-low enterprise multiple yet, though, so maybe more puke-age to follow. Trick is deciding whether to leg in now or on the way back up. I'm already exposed to O&G sentiment so I'd prefer to wait and see what's what after December.Delete
Company issued the following release today:ReplyDelete
"Northbridge Industrial Services plc, the industrial services and rental company, notes the recent decline in the Group's share price and would like to advise the market that they are not aware of any operational or Group specific reason for the share price movement.
Neither the Company's circumstances, nor its trading environment, have changed in any material way since the last trading update on 30 September 2015."
They shouldn't be putting out a release like that if the covenant negotiations are going poorly, so I think it's a good sign. But of course, it wouldn't be the first time I've been misled by management.
Wording is comprehensive and unequivocal. Interesting. ThanksReplyDelete
Volume today is very high, 25x to 30x daily average, 7% of the company's shares...ReplyDelete
Well done chapsReplyDelete
Based on their website, it looks like the CEO, Chairman and an NED purchased 850k shares (5% of the company) at 70p a share.ReplyDelete
Eric Hook, the Chief Executive, is going all in:ReplyDelete