We are encouraged by the interim results for Northbridge Industrial Services (‘Northbridge’). The move to a positive, albeit modest, adj. PBT for the first time since H2 2014 signifies that a major milestone has been reached.
The step to profits is six months ahead of our expectation. Our adj. PBT estimate for FY2019 is raised, anticipating that the recovery in the Group’s markets is likely to broaden further and the operational gearing push profitability higher.
The gross margin increased 500 basis points to 44.7%, driven by the 23.6% (£2m) y-o-y uplift in the level of higher-margin rental sales. Despite costs (Cost of Sales plus OpEx) rising to their highest level since H2 2015, the Group still managed to deliver its second consecutive EBIT for the first time since H2 2014.
Crestchic performed well both in rental sales (up 21%) and in manufactured sales (34% higher), reflecting a combination of a widening of the recovery in the Group’s markets. The division began the year with its highest ever manufacturing New Year order book, reflecting higher demand from the USA and Europe. Underpinning the uplift in rental was the UK and European market, aided by recovery in the Middle East.
Tasman delivered revenues 29% higher y-o-y and more than doubled from the levels of two years ago during H1. The main driver was the improving Australian gas and LNG markets, although two new oil fields began to contribute during H1. While volumes have begun to rise in energy markets, reflecting the effect of higher oil prices on exploration and production, prices appear to be bumping along the bottom (though they are stable).
The Group continues to benefit from high levels of operational gearing, reflecting the fact that most Group revenues come from rental activities (62%). We have modestly increased our adj. PBT estimate for FY2019 from a break-even position to £0.2m, rising to an unchanged £2.5m in FY2020. Following a stronger than anticipated H1 in 2019, we have raised revenue estimates by 10.2% in FY2019 and 5.6% in FY2020, suggesting the FY2020 uplift will be predominantly driven by Tasman.
Northbridge achieved the key milestone of returning to profitability during H1 and the next goal may be a resumption of dividend payments. Ahead of this, profitability needs to improve further, coupled with rising confidence in the outlook for the business. But the ongoing pace of the recovery in the Group’s markets greatly encourages us.
The modest increase in FY2019 estimates results in an uplift in our DCF-based fair value per share to 204p (from 203p).
