The trading updates continue to improve from Northbridge. The pre-close report in February highlighted Crestchic’s largest ever New Year order book in manufacturing, while June’s AGM statement suggested that the recovery during the first five months of the year had been led by hire. In today’s statement, management says that trading ‘is very much improved’ y-o-y, with the recovery in rig count within energy markets resulting in higher activity levels, particularly in hire and across both divisions. As a result, management is confident of achieving FY19 expectations. We find this confidence most encouraging in view of the short-term nature of the hire activity of both divisions.
On unchanged estimates, our DCF-based fair value of 203p per share remains intact. In view of the improving momentum within the business, we see little justification for the share price decline from late April onwards.
During H1 2019, Northbridge has delivered a significant improvement in revenues y-o-y within both divisions, albeit from a low base. The strength of recovery has deepened to now touch all industry segments in which the group operates. The primary driver has been the rise in rig count, although hire rates have improved only modestly from depressed levels at Tasman. In order to meet the rising demand, management has invested in the hire fleets of both divisions where appropriate.
Crestchic, the supplier of load banks and transformers, has proved resilient. Strong performances from power reliability and data centres (power load and heat load testing) has widened with both energy and marine industry delivering marked improvements yo-y. Crestchic continues to gain traction in the US and follows from the shipping of Asian inventory last year. The higher manufacturing orders have resulted in a short-term growth in working capital, although we expect this to reverse during H2.
The acquisition of a large hire fleet from a Malaysian company in administration in late 2018 has proven to be a shrewd move. Tasman is emerging from the recession in its markets with a much wider geographical and customer footprint and as a result, has gained market share from competitors. The improvement in rig count in the Australian gas and LNG export markets is currently proving helpful, which we expect to improve further in view of the early stage of recovery.
We have highlighted previously that, with hire accounting for approximately two-thirds of revenues, the business remains highly operationally leveraged. The 78% growth y-o-y in EBITDA witnessed after five months (AGM), is likely to have improved further and not only underpins year-end financial estimates but also, cash flow. The widening and gathering pace of the recovery in the Group’s markets greatly encourages us. The unchanged estimates confirm our DCF-based fair value of 203p per share.