My wife has been badgering me to replace her nine-year-old Volvo because it is showing the usual signs of wear and tear. Yet, like most middle England families, and to the chagrin of the car makers, we have decided instead to postpone the purchase for the time being. Now that the government has introduced its £2,000 scrappage scheme for ten-year-old vehicles, there’s absolutely no incentive for us to trade in our old banger for at least another 12 months.
What does this all mean for Nationwide Accident Repair? The firm operates 73 body-shops in Britain, offering motor repairs to the insurance industry as well as private individuals. With more people deferring new car purchases, maintenance volumes should accelerate over the next few years.
However, in the short-term, thrifty consumers are cutting back on some discretionary repairs, especially of the cosmetic kind. Indeed, this temporary ‘air-pocket’ has adversely affected the company’s profitability by decreasing the amount of high-margin labour work. This in turn triggered a profit warning last Thursday.
Nationwide Accident Repair Services (Aim: NARS)
Nonetheless, the balance sheet remains strong and cash generation is good, with net funds of £7.4m as at 31 May 2009, compared to £5.4m in December. And although results will be hit in 2009, they won’t be demolished. Instead, I would still expect 2009 turnover and underlying earnings per share of around £180m and 10p respectively, rising to £185 and 13p in 2010.
These figures put the stock on undemanding p/e ratios of 8.2 and 6.3p. It offers a 6.1% dividend yield.
Growth is also expected from the smaller services division, which provides a one-stop-shop from two call centres handling claims after an accident. This service enables Nationwide Accident Repair to up-sell their policies to other drivers who may not have cover.
As always, there are a few potential potholes. One is the issue of just how long car owners can put off repairs in a recession. Set against that, all vehicles have at least to be road-worthy in order to pass their annual MOT. Next, the £16.4m pension deficit needs watching, although the defined benefit plan was shut to existing and new employees in 2006. In summary, with the age-profile of the British car fleet set to rise as cash-strapped families hold onto their cars for longer, a new wave of repair activity should provide a welcome boost to specialists such as Nationwide Accident Repair.
Recommendation: speculative BUY at 82.5p (market cap £35.6m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments