They don't come better than Goode
The Investment Column
Friday 10 January 1997
The business has been a stellar performer as the UK pulled out of recession and the latest half-year figures to October are no exception, with pre- tax profits rising 13 per cent to pounds 15.2m. But Goode's management deserves full credit for the performance of its Northgate vehicle hire operations, which represented 95 per cent of operating profits in the period and is the UK market leader in light commercial vehicle rental. The latest figures came despite a 2 per cent fall in hire rates as rivals scrambled for volume at the expense of margins.
The market is already showing signs of steadying and the decision to concentrate on this sector of the market has proved well made over the long term. The business has grown consistently, while Goode claims never to have made a loss when selling on its vehicles after their typical two- and-a-half year life with the group. Its success is a strong argument for its four-year depreciation policy, even if purists might suggest it would be more appropriate to write the van fleet down over its 30-month average life with the group.
But the totem around which Mr Waring runs his business is utilisation rates, which have hardly wavered from 91 per cent since 1992. He argues that if fleet usage falls below that level, it is time to sell and, given the resale values, he has no problem getting rid of the excess. Thus far, the fleet has grown steadily, as the successful formula of flexible rental, formalised under the Norflex brand name last autumn, has continued to win customers.
Recent wins, including Rolls-Royce, Coca-Cola and Ever Ready, add to a lengthening list of blue-chip clients and the long-term omens look excellent. Northgate's 7 per cent share of a total hire fleet which is just 7.5 per cent of the total number of vans on the road suggests bags of scope for overall market growth and the group's share within it.
The potential is illustrated by the fact that some 28 per cent of the more developed US van fleet is supplied through rented or leased vehicles.
Goode must live on its wits to retain its customer base, given the lack of any contractual relationship. More serious doubts could be hung around the discounts received from Ford for buying so many of its vehicles every year. That will account for over half group profits this year, but shows no sign of being withdrawn in the short term. These are minor caveats and an upgraded forecast of pounds 25m from Mees Pierson suggests the shares, up 6p at 414.5p, are still good value on a forward rating of 14.
British Borneo's shares have gushed in the past year, rising three- fold on the back of a rising oil price, a steady flow of good exploration news and most recently buoyed by the takeover speculation that has frothed around the sector since Gulf Canada made a pounds 430m tilt at Clyde Petroleum.
Yesterday's news that its Morpeth field in the Gulf of Mexico probably holds 50 per cent more oil than previously expected sent the shares sharply higher again.
Trading at less than 800p a week ago, the shares broke through pounds 10 yesterday to close at 1,010.5p, a record high for the stock.
Early expectations for Morpeth had put reserves at about 50 million barrels of oil equivalent. Yesterday Borneo said it expected the field to yield 77 million barrels and said that under optimum conditions it could produce as much as 92 million.
The Morpeth announcement was the latest in a string of positive moves by the explorer that has seen it exploit close links with BP and Shell in the Mexican Gulf, widely viewed as one of the world's most exciting exploration areas.
Earlier this week, the company said it was buying a 40 per cent stake in a BP field and last month it bought rights to drill three tracts held by Shell.
It is quite some transformation for a business that eight years ago was nothing more than an oil sector investment trust.
In the interim, under the guidance of youthful chief executive Alan Gaynor, British Borneo has built up an enviable portfolio of exploration and production assets and it is little surprise that it has been widely tipped as a takeover candidate.
Anyone who has missed the party so far, however, should tread very carefully and cast their memories back to the early 1980s when the sector last had its moment in the sun. Ten years ago the oil sector shared many characteristics with today's volatile biotech stocks.
The problem for any investor in oil explorers is that valuing the companies is little more than a finger-in-the-air exercise. It involves assumptions about the oil price, the size of reserves, exchange rates and, most importantly, the interest rates used to discount back future cash flows. Small changes in one or several of those can cause giant swings in value both up and down.
Some analysts believe Borneo shares could be worth up to pounds 12. Others, especially those who think a takeover at this level unlikely, are recommending profit-taking and a switch into a more likely bid target such as Cairn Energy. After such a strong run, caution should be the watchword.
Reg Vardy motors on
In an industry still stuck with an Arthur Daley image, Reg Vardy stands out. The Sunderland-based car dealer was one of the first to spot the potential of nearly-new vehicles when the bottom fell out of the new car market in 1989 - the year Vardy joined the stock market at 90p.
Since then the shares have bounded ahead, partly on the back of Vardy's nous for spotting trends early. The latest shift is for manufacturers to favour a geographical market approach rather than granting one-off dealerships - leaving distribution of their cars to dealers responsible for their own patch.
This requires a significant level of capital expenditure by distributors so Vardy, along with several other motor dealers, was not slow to come cap in hand to investors last year, raising pounds 27m via a one-for-five rights issue at 300p.
The shares drifted south following the cash call, partly due to poor autumn sales, but yesterday's better than expected results helped restore confidence in the shares, which closed 23p higher at 315.5p. Shares in Pendragon, another well regarded motor dealer, jumped in sympathy.
Vardy's pre-tax profits before one-off items rose by 28 per cent to pounds 7.86m on sales 23 per cent ahead at pounds 344.6m thanks to strong organic growth in both vehicle sales and after-sales operations. Just under two-thirds of the 36,572 (30,125) units shifted were used vehicles, where the underlying increase in gross profits was an impressive 36 per cent.
Vardy used the rights issue money to cut gearing to 11 per cent and to increase the number of car dealerships to 43, with a target of 60 within a couple of years. Recent franchises awarded include Fiat in Birmingham and Honda in Newcastle.
Despite rising interest rates and the buying hiatus a general election is likely to cause, prospects remain good. Broker Granville Davies sticks with its full-year pre-tax forecast of pounds 17.3m rising to pounds 18.8 in 1998., implying a price/earnings ratio of 14 falling to less than 13. Solid value.
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