Business Overview
AIM-listed Redde Plc (LON: REDD) is a United Kingdom-based leading support services company, which specialises in accident management support, fleet management, legal services, and policy fulfilment services. It was incorporated in the year 1992. The group mainly works with prestige motor dealerships, insurance companies, and insurance brokers. Redde is a Latin word which means restoration. The company also provides assistance and services related to non-fault accident management, legal services and fleet management. The group companies include Auxillis Limited, NewLaw Legal Limited, Auxillis Services Limited, Principia Law Limited, FMG Group Support Limited and Cab Aid Limited. The company also through its operational call centre in Croydon, Huddersfield, County Durham and Peterlee provides accident management services. The company via Bristol-based NewLaw Legal Limited, Northwich based Principia Law Limited, Cardiff and Glasgow based associated office provides solicitors services.

Key Statistics


Top Shareholders
 
Management

John Davies is the Non-Executive Chairman of the group since August 2019. The Chief Executive Officer of the group is Martin Ward and was appointed as CEO in October 2011. Stephen Oakley holds the responsibilities of Chief Financial officer. Mark Chessman holds the responsibilities of the Chief Operating Officer (COO) of the group since July 2018.

Key Parameters – Year 2019


(Source: Annual Report, Company Website)

The company has an employee base of more than 2,400 professionals and operational sites comprising 27 branches. As per the current data provided by the company for the year ending 2019, the total sales stood at £589.7 million and adjusted EBIT was reported at £49.3 million.The company, through rental partnerships, has access to more than 50,000 vehicles and manages nearly 10,000 vehicles of its own fleet. The company, through the FMG group of companies with more than 400,000 fleet vehicles, provides incident management services and specialised large fleet accident. The Group is well-positioned to ensure that replacement vehicles can be delivered to clients promptly.

Key Areas

The company is differentiated into four key areas where the group deliver depth and breadth of flexibility, service, and expertise: Delivery of Insurance Services and Accident Management, Corporate Fleet Management, Provision of Legal Services, and Insurance Policy Service Fulfilment. The operational businesses in Accident Management/Insurance Services have been delivering elevated-quality accident management services to most sectors of the automotive and insurance markets for more than two decades. In Corporate Fleet Management, FMG group delivered tailored high-quality services to corporate fleets, fleet insurers/brokers, blue light organisations, unique market-leading, leasing companies, local councils, daily rental companies, and other government agencies. In Legal Services, the company is able to provide a wide spectrum of expert legal services through an array of channels to both private clients and businesses. In Insurance Policy Service Fulfilment, the company provide insurance policy support to more than three-quarters of a million United Kingdom motorists with products such as: motor legal expenses; excess protection cover, and a replacement vehicle.

Financial Highlights (for the year ended 30 June 2019)

Led by an increase in credit hires by 9.4% and increase in repairs undertaken by 5.2% for the financial year 2019, the company’s revenue surged by 11.9% to £589.7 million in FY19as against £527 million in the financial year 2018. The gross profit surged by 7.8% to £137,690 thousand in the financial year 2019versus a gross profit of £127,782 thousand in the financial year 2018. For the financial year 2019, EBITDA declined by 0.9% to £54.9 million against the EBITDA of £55.4 million in the Financial Year 2018. The company’s adjusted operating profit (from continuing operations) stood at £44,315 thousand in FY2019 versus an adjusted operating profit (from continuing operations) of £43,985 thousand in FY2018. The company’s operating profit (from continuing operations) stood at £36,681 thousand in FY2019versus an operating profit (from continuing operations) of £36,776 thousand in FY2018.

The adjusted earnings before interest and taxation (EBIT) increased by 7.3% to £49.6 million in FY2019 as compared with an adjusted EBIT of £46.2 million in FY2018. The adjusted EBIT margin stood at 8.4% in FY2019 versus an adjusted EBIT margin of 8.8% in FY2018. The EBIT stood at £41,942 thousand in FY2019 versus an EBIT of £38,982 thousand in FY2018, reflecting an increase of 7.6 per cent for the period. The company’s adjusted PBT (Profit before tax) surged by 7.1% from £46 million in the financial year 2018 to an adjusted PBT (Profit before tax) of £49.3 million in the financial year 2019. The company’s statutory PBT (Profit before tax) surged by 7.3% from £38.8 million in the financial year 2018 to a PBT (Profit before tax) of £41.6 million in the financial year 2019.The company’s statutory PAT (Profit after tax) stood at £34.5 in the financial year 2019and remained the same from the previous year (2018: £34.5 million).

The adjusted basic earnings per share surged from 13.27 pence in the Financial Year 2018 to adjusted basic earnings per share of 13.44 pence in the Financial Year 2019, reflecting an increase of 1.3 per cent. The statutory basic earnings per share declined from 11.36 pence in the Financial Year 2018 to statutory basic earnings per share of 11.28 pence in the Financial Year 2019. The adjusted diluted earnings per share stood at 13.21 pence in FY2019 versus adjusted diluted earnings per share of 13.07 pence in the financial year 2018. The statutory diluted earnings per share stood at 11.08 pence in the Financial Year 2019 versus statutory diluted earnings per share of 11.19 pence in the financial year 2018.

The board recommended a final dividend per share of 6.15 pence which reflects a total dividend per share of 11.65 pence. The final and total dividend is the same from the corresponding period of the last year.

 Key Performance Indicators

(Source: Annual Report, Company Website)

Revenueis the income generated by the company from its normal day to day operations. Redde Plc showed an increase in the revenue by 11.9 per cent to GBP 589,724 thousand in FY 2019 as against GBP 526,981 thousand in the financial year 2018. Profit before tax (PBT) gives the earnings available to the company before taxation paid by the company. The company’s PBT (Profit before tax) surged by 7.3 per cent to GBP 41,654 thousand in the financial year 2019 from GBP 38,812 thousand in the financial year 2018. EBIT (Earnings before interest and tax) gives the earnings of the company before paying interest expenses and tax charges. Redde Plc’s EBIT surged by 7.6 per cent to GBP 41,942 thousand in FY2019 from GBP 38,982 thousand in FY2018. Adjusted basic EPS is used to check the quality of EPS (earnings per share) of the company. The company’s adjusted basic earnings per share surged by 1.3 per cent to 13.44 pence in FY2019 versus adjusted basic earnings per share of 13.27 pence in FY2018.

Financial Ratios

 

The reported gross margin in FY2019 declined by 0.9 per cent to 23.3 per cent as against gross margin of 24.2 per cent reported in last year for the same period. The reported EBITDA margin declined for the FY2019 to 9 per cent versus the EBITDA margin of 10.1 per cent reported in last year for the same period. The reported Pretax margin stood at 7.1 per cent for the FY2019 as against Pretax margin of 7.4 per cent reported in last year for the same period. The Pretax margin is higher than the industry median of 6.6%. The company reported a net margin of 5.9 per cent for the financial year 2019, an increase of 0.6% from the industry median of 5.3%. Return on equity for the Financial year 2019 stood at 21.5 per cent, a slightly lower than the previous year data but an increase from the industry median. The group has consistently delivered an ROE above 15 per cent for the last five years, which is a robust fundamental indicator, high return to the shareholders and also shows management efficiency. On the liquidity front, Redde Plc’s current ratio stood at 1.16x and was higher than the industry median of 1.01, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity and asset-equity ratio of the Redde Plc’s was 0.29x and 2.41x, which was lower as compared to the industry median of 1.31x and 3.83x. This signifies that the company is less leveraged as compared to its peers.

Share Price Performance


Daily Chart as at January-14-20, before the market close (Source: Thomson Reuters)

On January 14, 2020, at the time of writing (before the market close, at 11:08 AM GMT), Redde PLC shares were trading at GBX 108.40, up by 1.19 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 187.80/GBX 82.30. Stock’s average traded volume for 5 days was 3,658,743.40; 30 days – 2,369,742.27 and 90 days – 2,320,029.64. The average traded volume for 5 days was up by 54.39 per cent as compared to 30 days average traded volume. The outstanding market capitalisation was around GBP 328.96 million, with a dividend yield of 10.87%.

The shares of the company have delivered a positive return of around 3.63 per cent in the last three months. On a year to date basis, the company’s stock has given investors approximately 2.26 per cent of a positive return.

Valuation Methodology
Method 1: Price/Book Value Multiple Approach (NTM)



To compare Redde Plc with its industry median, Price/Book Value multiple has been used. The industry median of Price/Book Value (NTM) was 2.40x (approx.).

Method 2: EV to Sales Approach (NTM)
 


To compare Redde Plc with its peers, EV/Sales multiple has been used. The peers Stagecoach Group Plc (NTM EV/Sales was 0.8), Northgate Plc (NTM EV/Sales was 1.18), Rotala Plc (NTM EV/Sales was 0.74) and Eddie Stobart Logistics Plc (NTM EV/Sales was 0.18). The Average of EV/Sales (NTM) of the company’s peers was 0.73x (approx.).

Euro Outlook for 2020
European Union  growth expected to remain below the expectations. With inflation unlikely to approach its target in the near term, the ECB (European Central Bank) is anticipated to cut rates by another 10 basis points in early 2020, marking the end of the easing cycle, but monetary normalization is unlikely to start until late 2021. In the United Kingdom, despite the landslide election victory by the conservative party, the economy is unlikely to turnaround quickly enough to prevent a one-off rate cut by the Bank of England in January 2020. The United Kingdom is on track to leave the European Union on January 31, but uncertainties will likely to linger on its future trading relationship with the EU.

Risk Assessment

Depending on the outcome of Brexit, there are scenarios which could result in delays in the sourcing of required replacement parts for repairs or new vehicles into the UK. This reflects an unfavourable effect on costs and may impact the supply chain. Due to a higher level of debt, the company might face credit risk in the near term. The company also operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors.

Growth Prospects


(Source: Annual Report, Company Website)

The above image shows the company’s total shareholder return as compared with the FTSE AIM 100 index over the past five years. Despite the great fall in the share price in 2019, the company is now stable to perform and offers a decent return to the shareholders and also perform well on the financial front.The new business in the pipeline will help the company to expand its operations and to gain more market share. The company continue to invest to meet its strategic goals. The market in which the company operates will continue to grow and expand in the future, to benefit from this expansion, the company is actively looking for acquisitions.

From the perspective of the market, the members of the ABI (Association of British Insurers) mentioned that the cost of repairs has surged, driven by the increased repair cost of realigning and the costs of bumper safety sensors. The company’s merger with Northgate will act as an attractive opportunity and will provide strategic benefits in future.

Conclusion

The positive impact on working capital is anticipated to increase traction later in the fiscal year 2020 to accommodate this extension.The company has won several new contracts in other regions of the Redde PLC as well as a contract renewal with a key insurer, all of which have contributed to the Board’s confidence in its anticipations for the fiscal year 2020. 

In 2019, the Group reported a record revenue and an increase in adjusted PBT. It continues to diversify into related markets where the returns and investment case are attractive and seek additional opportunities to scale up the business operations.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from £248.7 million in FY15 to £589.7 million in FY2019. Compounded annual growth rate (CAGR) stood at 24.09 per cent.

Based on the decent prospects and supported by valuation done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 107.20 (as on 13^th January 2020) with lower double-digit upside potential based on 2.40x NTM Price/Book Value (approx.) on FY20E book value per share (approx.) and 0.73x NTM EV/Sales multiple (approx.) on FY20E sales (approx.).
 
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on 14-January-2020).

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