The preliminary results from Northbridge IS were in-line with our expectations. Significantly, the uplift in the top-line has combined with the strong inherent operational gearing to move the Group to a near break-even position during H2 2018. This reinforces our confidence that the Group is on track to break-even in FY2019.
Revenues improved 4.9% y-o-y to £26.9m, modestly ahead of expectations. However, the split of revenues was key, with rental accounting for 64.8% of the total, predominantly reflecting a 22.5% y-o-y improvement at Tasman. This resulted in gross margins climbing to 43.6%, the highest level since H1 2015A. The strong operational gearing inherent within the Group’s operations was a major factor in significantly reducing the adj. PBT loss to £2.0m (FY2017A: loss of £4.4m). During H2, for every £1 of revenue added, we estimate that approximately 67p fell through to EBIT.
Cash generation continued to be strong, with operating cash flow rising to £4.3m (FY2017: £2.6m). This was supplemented by the placing of 2m shares at 125p, raising a net £2.4m. The acquisition of the lightly used hire fleet of a distressed competitor in SE Asia (PPC) for £3.1m in November 2018, resulted in a greater ability to service existing customers not only in Malaysia (JV of Olio Tasman), but also customers (some from PPC) in Singapore, Thailand and Vietnam.
Conditions in the Group’s markets are improving, with opportunities opening to both divisions. That said, we believe the greatest upside lies with Tasman Oil & Gas in the short-term, reflecting the improving confidence at E&P companies, afforded by a stable oil price. The LNG, natural gas and geothermal markets are currently showing signs of recovery. Over the medium term, the recovery in the oil & gas energy sector will feed through to the marine sector of the power reliability market.
We feel the Group’s current rating (a modest premium to its net asset value) ignores the next stage of recovery, with new PBT estimates of £2.5m in FY2020 and a resumption of dividends likely from FY2021.
Updating our DCF model to incorporate the new FY2020 estimates indicates a fair value of 203p/share (up from 173p previously).
