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. We therefore 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.
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. This gives great encouragement for the outlook for FY2019 and beyond.
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 deferred consideration for Tasman New Zealand was paid during the year, which amounted to £1.1m. Management also took the opportunity to re-finance its banking facility, raising £4.0m from convertible bonds, with a conversion price of 125p per share in mid-2021. One of its banks was repaid using the proceeds, leaving one international bank, which is very supportive.
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. The acquisition reduces the need for investment at Tasman and, while Crestchic is still likely to require capex, it is likely to be below current levels of depreciation.
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. This, coupled with long term growth in the data centre, renewable energy, the USA, smart grids and transmission systems should ensure that Crestchic continues to progress.
The shares are currently sitting at a modest premium to net asset value. In view of the growth in its markets, with the operational gearing leading to a rapid recovery into profitability by H2 2019, we believe the shares should be trading significantly north of the current share price.