The Investment Column: Debt-laden Northgate has little to drive it higher

Hunting; Intermediate Capital Group
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The Independent Online

Our view: Sell

Share price: 338.75p (-14.25p)

Investors who bought Northgate shares 18 months ago, on what turns out to be the misguided assumption that commercial vehicle leasing was the place to be, will be kicking themselves now. The kicking should be hard so as not to repeat the mistake.

Northgate shares have traded as high as 1,116p in the past 12 months, and, despite pretty decent full-year numbers posted yesterday, the group warns that the market cannot expect any growth in the next year.

The problem is £894m of debt. Its finance director, Bob Contreras, reckons it is manageable, even if any potential operational growth will be eaten up by higher interest charges.

Mr Contreras argues that changes like keeping vehicles for longer will help to offset lower sale prices, and that demand should be stronger as companies opt for cheaper rental fleets as opposed to buying transport.

However, analysts were reassessing forecasts yesterday. Watchers at Altium downgraded the group to "sell" from "buy" and set a new target price of 400p after suggesting it should manage 450p. Frankly, Northgate will do well to get close to the new target. True, the group only trades at 4.3 times earnings and should be a cheap punt, but not even the management reckons there is anything to push the stock north.

House broker UBS points out the group trades at a 13 per cent discount to its April 2008 book value, but quite how the stock gets to the experts' target price of 970p is baffling.

The company, which operates in the UK and Spain, says it is likely to add a new country fairly soon, but major acquisitions are off the agenda for the time being because the group wisely does not want to add to its debt.

If the company says there will be no growth in this financial year, there is no reason why shareholders should expect a surprise. Sell.


Our view: Buy

Share price: 850p (-30p)

The recommendation on the energy services group Hunting has been buy, buy, buy for some time.

Investors who heeded that advice in January when the stock was trading at 627p are quids in now and the group said yesterday that it expects trading to remain robust. Surely the potential is for more growth in the stock.

Watchers at Evolution say the shares are undervalued versus the rest of the sector, although that may have something to do with the bidding war between Halliburton and the private equity group Candover over rival Expro, which the financial sponsor won for £1.6bn.

Some analysts say that, having lost out in its bid for Expro, Halliburton's attention may well turn to Hunting. Those at Evolution say the group trades at 16.5 times its estimated 2009 earnings, at a "slight discount to the sector, whilst M&A remains, in our view, a strong possibility". The sector is expected to trade at an average of 17.6 times earnings next year.

Spending by exploration companies will grow this year, but it is the spectre of a takeover that should really excite potential shareholders.

Yes, the group trades at a discount, but it is slight and the performance of the stock in the past 12 months is largely backed by rising energy prices. Many economists now argue that oil will fall to around $103 a barrel by September 2009, according to the Treasury projections.

Analysts at Oriel Securities say that they expect to see the stock at 880p in the next 12 months, which, given the growth in the past 12 months, is not that exciting. Investors will not see an investment fail in the short term, so it is probably best to buy and give it six months to see if an offer comes in. Buy.

Intermediate Capital Group

Our view: Sell

Share price: 1,300p (-57p)

Much has been written about the ills in the leveraged loan market and the inability of banks to sell their debt exposure. ICG is a specialist provider of mezzanine finance, part of the junior debt of most transactions, which put it at the epicentre of the storm when the bottom fell out of the market last year.

The market has not come back and a recession will jeopardise the future of highly leveraged businesses. However, ICG points out that, while things will be tough, it is taking the opportunity to operate more in Asia and to buy up debt in the secondary market that is trading well below face value. In a trading statement yesterday, ICG said that capital gains will be substantially below last year, but that performance, given the market, will be satisfactory.

Chief executive Tom Attwood, says he could not give a hoot about the short-term share price, so long as in the longer term it goes in the right direction. Just as well, because the analysts cannot agree on where the stock will be in the next year; predictions range between about 1,400p to more than 2,000p.

ICP has a conservative approach, and that is sensible. However, yesterday's statement led to a 4.2 per cent slide and there is little evidence that things will improve soon. Sell.