Northern Bear, the North of England based support services group, announced its results for the year ended 31st March 2009 on 25th June and they served as a demonstration of the company’s robust nature and sound defensive qualities. Underlying pre-tax profit increased by 8% to £3.08 million on turnover which rose by almost 30% to £41.76 million. Basic earnings per share increased by 12% to 11.5p.

A net £2.04 million was generated from operating activities during the year, though overall there was a £1.17 million cash outflow – mainly as a result of £4.07 million of acquisition expenditure. At the period end, the balance sheet showed net debt of £9.29 million, net current liabilities of £2.99 million and net tangible liabilities of £3.99 million. However, net interest cover was a comfortable 4.78 times during the year and despite the economic climate the company was recently able to renegotiate and improve its banking terms – with committed facilities of £11 million meaning it has decent headroom. However, with a priority to conserve cash and repay debt, Northern has taken the decision to suspend a final dividend payment, though it noted “should trading continue to improve, we will reinstate our dividend policy at the earliest point at which it is responsible to do so”.

The results further validate the company’s diversified business model and its strategy early in the cycle of repositioning away from the new house build sector, which accounted for just 4% of turnover, reduced from 13% in the prior year. The specialist businesses in the fire protection, asbestos removal and equipment rental areas provided insulation from those, particularly with exposure to the new house build sector, which found the environment more challenging. However, even the businesses with links to the new house build sector continued to contribute to profitability.

Looking forward, Northern Bear’s diversity and strong long-term relationships in both the public and private sectors means it looks set to continue making progress and the company has reportedly experienced an encouraging upturn in some of its businesses since the year end. It also remarked in the results statement that it “continue(s) to win new customers and source new markets” and that “(acquisition) still remains a key part of our strategy” – though the intention is to fund future acquisitions with a combination of equity and own resources instead of the former and bank debt as particular focus is placed on a solid financial base.

Whilst the suspension of a final dividend is disappointing since the yield has represented an attraction for income seekers, the focus on cash conservation and debt repayment is sensible at the present juncture. Even were Northern to meet only our reduced bottom of the cycle forecasts for this year it would still be able to repay £2 million of borrowings so bringing net debt well below twice EBITDA. Were Northern to eschew acquisitions – which we deem unlikely – we would expect its borrowings to be cleared within three years.

The company’s current level of debt may deter some investors but we would note that interest cover remains comfortable, its lenders are clearly supportive and that the company has consistently proven its ability to generate sufficient cash flows in the toughest of trading environments. We have pared our forecasts for the current year since although Northern speaks of having “experienced an encouraging upturn in the levels of demand in some of our businesses” since the year end, it also admits that in terms of outlook there is “ongoing uncertainty”. However, even assuming no organic or earnings-enhancing acquisitive growth in the current year, which we believe unlikely, the shares, at 56.5p, trade on a multiple of just 6 times bottom-of-the-cycle earnings. Given the scope for a material uplift in earnings by 2012 – when earnings could well reach 15.5p – we would argue that a multiple of 12 times bottom of the cycle earnings is not unfair: As such we retain our stance of buy with a target price of 110.4p.

Forecasts Table

*Northern Bear is a corporate client of Bishopsgate Communications, which is owned by Rivington Street Holdings, the ultimate owner of GE&CR. The SF t1ps Smaller Companies Growth Fund, operated by another subsidiary of Rivington Street Holdings, owns shares in Northern Bear; as does Rivington Street Holdings itself.