MIDAS STOCK TIPS: Road company Redde Northgate is driving

An estimated 2.6 million road accidents occur in the UK every year. Most are relatively minor. Some are life changing. Virtually all require assistance, from roadside recovery to repair work to replacement vehicles. Redde Northgate offers all of these services and more.

Customers include insurers, leasing companies and large companies. The company is tasked with handling accident claims for 20 million British motorists, around half of the country’s motorists.

The group also owns more than 130,000 vans and company cars here and in Spain, making it one of the largest operators in the industry, with customers ranging from Tesco to local contractors and delivery drivers.

The company was founded in February 2020 when accident services company Redde merged with van leasing specialist Northgate. The idea behind the deal was to create a company that could make life easier – and cheaper – for everyone who drives, leases or insures cars and vans.

So it has proven itself. The company has attracted customers, achieved increasing profits and paid generous dividends to shareholders. Yet Redde Northgate shares have lost a quarter of their value this year and are trading at just £3.17. The decline is undeserved and should be reversed if chief executive Martin Ward proves his mettle.

Support System: Redde Northgate provides services such as roadside recovery and temporary cars

Before the merger, Northgate had a spotty track record and was criticized for pursuing growth over profits and relying too heavily on certain sectors such as construction. Ward came from Redde, a smaller company that seemed to be better able to withstand the economic ups and downs. While many collaborations fail, this one delivered everything it promised and more.

Both companies had vehicle fleets. The combination meant they had more to offer and were able to appeal to larger customers. The merger also resulted in a significant increase in car and van depots as well as body workshops for repairs. This means that replacement vehicles can be provided more quickly and accidents can be resolved more quickly, increasing the group’s attractiveness for both insurers and fleet owners. Scale also enables Redde Northgate to offer better rental and repair deals than smaller operators, a feature that is particularly attractive in today’s inflationary environment.

The combined size has also given Ward access to more vehicles, helpful at a time when production of new cars and vans remains limited, particularly in the UK. Thanks to these advantages, Redde Northgate has reduced costs, increased profit margins, acquired new customers and offered more services to existing customers.

The company has also expanded its fleet and made some smart acquisitions, such as Fridge Express, which supplies food and pharmaceutical companies with temperature-controlled vans, and ChargedEV, which provides electric vehicle charging stations for homes and businesses.

The group also helps clear vehicles after accidents on the highway. She is commissioned by the police and the National Highways to be on site and clear the roads quickly and safely.

The range of businesses and activities demonstrates Ward’s determination to make Redde Northgate a diverse and resilient business that can develop and grow even in difficult economic climates.

The latest results bode well, with sales rising 22 per cent to £1.5bn, profits rising 10 per cent to £166m and the dividend rising 14 per cent to 24p in the year to April 30, 2023. A trading report last month was optimistic, with Ward drawing confidence from growing momentum across the group and a rich pipeline of new business.

Brokers are also optimistic, although they assume that profits could remain stagnant for a while.

Redde Northgate sells vans when leases come up for renewal. A shortage of new vehicles has artificially inflated prices and this revenue stream is expected to decline as supply returns to normal. However, by 2026 the group’s annual turnover is expected to exceed £1.8bn, with the dividend rising to 25p next year and increasing steadily thereafter.

Ward is also ambitious and hopes to hit £5bn in sales over the next five years as the company grows here and in Spain. Further acquisitions are planned as Ward and finance director Philip Vincent seek to make Redde Northgate a one-stop shop for businesses and insurance companies.

Midas judgment: Ward and Vincent spent £260,000 of their own money buying shares last month. Your decision makes sense. At £3.17, Redde Northgate shares are trading more like a stock in trouble than a company in growth mode. That’s undeserved and should change as Ward moves the company forward and investors gain confidence in his performance. Redde Northgate now offers a dividend yield of more than 7 percent. Time to buy.

Traded on: Main market Ticker: RED Contact: reddenorthgate.com or 01325 467558