The recent trading update from Northbridge confirmed that the ‘talk’ of recovery has moved on to reality, with confirmation that the Group has returned to profitability. Significantly, the outlook for 2020 remains upbeat.
Moving into profit and the related improvement in cash flow allows the Group to take advantage of a broader range of options for growth. Management relayed this to investors recently, underpinning our expectations of continued strong top-line growth and a move to meaningful profitability over 2020 and 2021, along with a realistic possibility of a return to the dividend list.
Trading during H2 saw a considerable improvement on the prior year and continuing the trends experienced during H1. With most revenues derived from rental activities, the business demonstrates significant operational gearing.
While there is a degree of resilience within the UK and European markets for Crestchic, its overseas markets are generally more cyclical or, in the case of the US where the Group is a relatively new entrant, at the early stages of growth for the division.
Trading within the Group’s oil & gas drilling equipment markets performed strongly, albeit growing from a low base, and significantly outperformed activity in the wider market. Figures from Baker Hughes suggest that rig count across the Asia Pacific region, where the division is most active, declined 2.2% y-o-y. By contrast, Tasman benefited from recovering natural gas and LNG markets within Australia.
With no change to estimates, we have retained our DCF-based fair value at 204p / share. While this suggests a relatively high forward PER of 22.3x, the return to positive EPS in 2020 and the likely rapid growth, thereafter, indicates that the forward PER for FY2021 will be more reasonable. That in turn provides scope for further momentum in the share price, particularly should EPS momentum improve faster than currently anticipated.
