Northgate PLC (LSE:NTG) is a provider of flexible fleet rental to

the UK and Spanish markets and a successful turnaround following

the difficult 2008/2009 period.

The shares trade for ₤2.6, enterprise value* is ₤772.9m. The

multiples are:

________________________________________________________________________

EV*/EBITDA** EV/FCF EV/EBIT EBIT/EV P/E

x2.65 x5.7 x8.2 12.2% x8.8

________________________________________________________________________

* Net debt amounting to ₤418.5m (₤385.3 excluding operating

leases) and diluted shares as of April 2012 (136.31 million)

have been considered for the calculation of market capitalization

and EV

** EBITDA (EBIT + Depreciation + Amortization), EBIT (operating

profit after exceptional expenses), FCF (operating cash flow,

after vehicle sales and purchases less maintenance capex) are

calculated based on April 2012 results.

THE INVESTMENT THESIS:

1 - Northgate trades below private market value while it offers a

sensible foothold in UK and Spain -- two countries in which some

of the major players enjoy either glorious or (surprisingly)

inglorious market positions (more details later in the document).

As a general trend the industry is undergoing a process of

consolidation with some deals completed in 2011 (Avis/Avis

Europe, Hertz/Donlen, Avis/Apex, Alphabet/ING Fleet, ARI/Fleet

Support) or undergoing (Hertz/Dollar Thrifty).

It appears that there is a gap between the current trading

multiples of Northgate and the multiples paid by CAR for Avis

Europe or proposed to be paid by HTZ for DTG.

- Avis purchased Avis Europe at ~13 times earnings;

- Hertz offered DTG about 15.3 times earnings (2012 estimated

earnings of DTG);

- DTG, CAR & HTZ trade at x13, x14, and x19 P/E (source: Reuters)

A buyer of Northgate would acquire:

- sensible enhancement of the UK and Spanish market positions.

Northgate is (arguably) the largest independent player in UK and

probably in Spain, too (details later in the document);

- a portfolio of more than 4,000 customers, a network of 62

locations in UK, 23 in Spain;

- an EBIT / EV yield of 9.8% (at an acquisition price of

₤4/share);

- a respectable stream of free cash flow FCF/EV yield of 14.1%

(at ₤4/share) and profits with room for improvement if, for

instance, cost of debt is reduced from the current 7.1% achieved

on average by NTG;

- a little extra on the side -- the ’’Van Monster’’ retail sales

network which operates eight locations in UK and five in Spain.

If, those assets are as attractive as I think they are,

especially given:

- the consolidation trend;

- the inglorious market positions of some major players in UK and

Spain;

… then maybe Northgate is worth more than ₤2.6/share and maybe a

multiple of 3.5-4 times EBITDA (£600-£746 million equity value),

meaning ₤4.5 - ₤5.5/share would be closer to fair value and

would provide a premium of 69% - 110% to current market price

Rumor - In October 2012 the Times printed that Avis might be

offering to buy Northgate for ₤4/share (a 54% premium to current

price). That would value the company at ~£545m market cap, or

~13.5 times earnings, or 3.31 times EV/EBITDA (as of April 2012).

2 -- On a stand alone basis equity value shall grow with debt

reduction (scheduled bank repayments of £68m - 16% of total

finance obligations - due as soon as November 2012), or better if

fundamentals improve further:

The current Enterprise Value is about ₤773m of which net debt +

leasing ₤418.5m. During 2008-2012 Northgate produced on average

₤115m of free cash flow and ₤322m of EBITDA:

______________________________________

Million ₤ EBITDA* FCF

2012 291 136

2011 309 95

2010 306 182

2009 363 163

2008 340 (1.2)

_____________________________________

Average 322 115

* EBITDA = EBIT + Depreciation + Amortization + Impairment of

intangible assets (2011,2009).

EXIT @ 29% IRR

Assuming that in three years time:

- Enterprise value of the company remains ₤773m;

- EBITDA is ₤291m;

- FCF is ₤136m annually;

- outstanding shares will be 138.6 (vs 136.3 April 2012);

- and debt is fully paid back;

Then the equity of Northgate would be valued around the rather not expensive

multiples of:

- EBITDA multiple => 773/291 = 2.65 times

- FCF multiple => 773/136 = 5.68 times, FCF yield = 17.1%

- price per share = ₤5.47,

If the entry price per share is ₤2.6 the IRR is close to 29%

(assuming no dividends are paid during the next three years).

EXIT @ 15% IRR

Maintaining the same assumptions as above except enterprise

value which I have assumed now to be ₤552m in three years’ time

then the resulting IRR of 15% is accompanied by:

- equity value (no debt outstanding) = ₤552m;

- price per share = ₤3.88

- EBITDA multiple = 1.9

- FCF multiple = 4.06 (FCF yield of 24.7%)

Not expensive multiples and decent return.

***

The analysis below tries to evaluate the performance of the

business and the risks.

REVIEW OF THE BUSINESS

Following nine years of consecutive growth, Northgate’s fleet

peaked at 131,350 vehicles in 2008 of which UK 68,600 and Spain

62,750. The tide has turned, fostered by a radical drop in

residual values (‘‘used car auction prices fell by ₤1,000/unit in

the second half of 2008’’, source: BCA -- European Used Car Market

Report).

During summer 2009 (fiscal 2010) the company had to defer the

testing of covenants, raised new equity (₤108m) and has agreed

new lending facilities (£880 million, which became effective,

upon the receipt of the equity raising proceeds). During fiscal

2010 the CFO who had joined in 2008 became CEO, a new chairman

was appointed, as well as a new CEO and a new CFO in Spain. This

management team (whose compensation is currently linked to ROCE

and EPS, in 2011 CEO’s compensation was linked to ROCE and net

debt levels) barred a strategy that promoted ‘‘market share

first’’ and promoted a new one which could be summarized by a

‘‘leaner but fitter’’ slogan.

Deleveraging, positive free cash flow generation and the

improvement of the bottom line (and ROCE) have been achieved via:

- the organizational restructuring of the company - by

consolidation of 20 operating companies in UK and two in Spain

accompanied by putting all the services under one brand,

implementation of company wide ERP and centralization of customer

service;

- The fleet size decreased by 30% during 2008-2012 but the rental

revenues decreased only by 13% due to the raising of the average

rental prices and management of the assets that achieved 88-90%

utilization of the vehicles (by selling excess vehicles and

better management of the fleet). By comparison Dollar Thrifty

affirms vehicle utilization of 80-83%;

- obtaining a certain diversification away (mainly Spain) from

customers operating in construction industry by increases in

wholesale and retail distribution, and electrical, plumbing and

equipment maintenance service sectors (in April 2012 the

construction had a weight of 34% of vehicles on hire as compared

to 37% in 2011 and 55% in 2010);

- closing down some locations in both UK and Spain

- reducing the number of personnel to 2,918 from 3,402 in 2009.

The turnaround is illustrated by the numbers below:

_____________________________________________________________________________

Year Vehicles TREV AARPV FCF Net Debt WC EBIT

pcs ₤m ₤/year/veh ₤m ₤m ₤m ₤m

_____________________________________________________________________________

2012 91,300 707 5,710 136 385 51 94

2011 104,700 716 5,566 95 529 62 83

2010 109,800 750 5,374 182 615 62 71

2009 123,300 771 5,320 163 936 185 -118

2008 131,350 775 5,108 -1 894 124 118

2007 120,300 715 5,058 -37 755 126 107

2006 111,000 523 4,535 4 524 63 73

_____________________________________________________________________________

TREV = total revenues, rent revenues + revenues from disposal of used vehicles (for 2006,

2007 the income statement did not include them so I plugged in the amounts corresponding to sales

of vehicles from the cash flow statement)

AARPV = Average annual rent per vehicle. Calculated by dividing rent revenues of the year by

average fleet for the year ((beginning balance + closing balance)/2)

FCF = free cash flow . Operating cash flow (after vehicle sales and purchases) less other

investments.

WC = working capital (current assets less cash - current liabilities less short term debt)

_________________________________________________________________________________________________

These good feats are accompanied by:

o allowance for doubtful receivables still large at (₤20.4)m

versus (₤22.2)m in April 2011 and (₤17.08)m in April 2010. Bad

debt at (₤3.2)m versus (₤4.3)m in April 2011 and (₤10.3)m in

April 2010. Net impairment of receivables at (₤4.9)m versus

(₤5.46)m in April 2011 and (₤12.07)m in April 2010;

o dilutive potential of various performance may go up to 10%

(momentarily 2.3%) of the shares. The CEO is remunerated with

₤375,000 in basic salary + ₤96,000 in pension but can make ₤

1,000,000 (including cash, deferred shares, performance shares

bonuses) if certain performance targets are achieved. Starting

2013 the CFO is remunerated with ₤200,000 in basic salary +

₤56,000 in pension but can make ₤520,000 if certain performance

targets are achieved. Employees can participate in a share

scheme where they receive one share free for one purchased;

o higher administrative expenses ₤60.6m (April 2012) vs. ₤56.8m

(April 2011);

o decrease of rental rates in Spain by 2% during April 2012 --Sep

2012;

o covenants could still turn sour if the business experiences

temporary setbacks:

‘‘- Interest cover at 30 April 2012 was 2.4x (2011 -- 2.1x) with

EBIT headroom, all else being equal, of £17m;

- Minimum tangible net worth - Headroom at 30 April 2012 was

£99m (2011 -- £85m).

- Loan to value at 30 April 2012 was 53% (2011 -- 63%) giving

net debt headroom, all else being equal, of £132m.

- Debt leverage cover at 30 April 2012 was 1.3x (2011 -- 1.7x)

with EBITDA headroom, all else being equal, of £97m.’’ (AR 2012).

The company will pay down ₤68m of debt in Nov 2012 which shall

deliver a bit more headroom for these covenants. The fact they

declared a small dividend (₤0.03/share) in June 2012 must show

some confidence (rather than lack of rationality);

o a reduction in the fleet size which may influence the

bargaining position with car manufacturers;

o the defined contribution pension scheme currently shows a

small surplus but was negative during 2008-2009.

MAIN RISKS

DECLINE IN RENTAL PRICES

In the UK the British Vehicle Rental and Leasing Association

(BVRLA) published a member directory 2013 which contains

information (not very exact but still meaningful) with regard to

the fleet sizes of its members as well as the market segments in

which they operate.

The table below presents the total fleet size for each player

that operates more than 3,000 vehicles, and their manner of

approaching the light commercial vehicles segment (vans up to 3.5

tones). Figure ‘‘1’’ means that they are active in that sub

segment:

R = Rental

L = Leasing

FM = Fleet Management

_________________________________________________________________

_____________________________________

Rank Fleet Size R L FM Company

Owner

_________________________________________________________________

_____________________________________

1 590,000 - - - Motability

A charity

2 296,961 - 1 1 Lex

Lloyds

3 167,886 - 1 1 Arval

BNP Paribas

4 135,720 - 1 - Leaseplan

VW & Friedrich von Metzler

5 112,616 - 1 1 Alphabet

BMW

6 66,645 - 1 1 Ald

Societe Generale

7 60,000 1 1 1 BT

British Telecom, spin off 2002

8 57,973 - 1 - Daimler

Daimler Group

9 55,000 1 1 - Arnold Clark

Sir Arnold Clark

10 55,000 1 - - Enterprise

Enterprise Holdings

_________________________________________________________________

______________________________________

11 52,900 1 1 1 Northgate

LSE: NTG

_________________________________________________________________

______________________________________

12 51,518 - 1 1 Hitachi

Hitachi Group

13 50,000 - 1 1 Ifs.Inchcape

Inchcape Group (LSE: INCH)

14 49,900 - 1 1 GE

GE Capital

15 39,937 1 - - Europcar

Eurazeo (RF.PA or RF FP)

16 34,656 - 1 - Leasedrive

MBO/Lloyds Development Capital

17 20,239 - - - Avis

18 24,427 1 1 - Peugeot

19 24,144 1 - - Hertz

20 16,470 1 - - Thrifty

21 15,000 - 1 1 Fleet Log

22 14,965 1 1 1 Fraikin

23 13,243 - 1 - Carillion

24 10,951 1 - - Burnt-Tree

25 10,866 - - - Ogilvie-Fleet

26 9,762 1 1 - DCH

27 8,915 - 1 1 Grosvenor

28 7,165 1 1 - FHS

29 7,060 - 1 1 Fleethire

30 7,000 - 1 1 Pendragon

31 6,817 1 1 1 Translinc

32 6,409 1 - - Budget

33 6,287 1 - - Clm

34 6,115 - 1 1 Jct

35 6,100 1 - 1 TVR

36 5,500 - 1 1 Tuskerdirect

37 5,000 1 - - Hiregate

38 4,950 1 - - Shb

39 4,936 - 1 1 TCH

40 3,587 - 1 1 FG

41 3,049 1 - - Sixt

_________________________________________________________________

_____________________________________

Total 2,141,955 19 27 20

_________________________________________________________________

_____________________________________

BVRLA 2,500,000

(the full table which shows the players’ presence in: cars, heavy

commercial vehicles and minibuses is available for download as an

Excel file at :

https://www.dropbox.com/s/3hfiz4s0q6ft5i5/Market%20Data.xls)

There are about 500 members of BVRLA operating 2.5 million

vehicles (which I assume to be the total market):

(i) - the top 5 players (+100,000 fleet) control 52% of the

market and are owned by major multinationals (notwithstanding a

telecom company and a charity). None of them seems interested in

the R (rent) segment (where Northgate conducts substantially all

of their business) but in the more secure long term L (leasing)

and FM (fleet management) segments. Should any of them (or a few)

move towards the R segment then a decline in the rental prices

may follow. On the other hand rather than distorting the market

they may look around for acquisitions (or if one distorts the

market by lower prices others may defend through acquisitions)

and Northgate qualifies as a target;

(ii) - the bottom 15 players in the table (fleets between 3,000 -

20,000 vehicles) + 459 others (which operate fleets of less than

3,000 vehicles) control about 22% market share (by fleet size).

This cohort shall pose a lesser threat since if they act towards

lowering rental prices they might be hurt themselves;

(iii) - the middle segment consists of 20 companies which operate

fleets larger than 20,000 vehicles but lower than 100,000.

Northgate, topped by 5 players in this group, ranks 11th in the

total table (notwithstanding the Spanish fleet) (but I am

inclined to think that they actually belong higher - the BVRLA

data on fleet sizes seems a bit outdated / larger than actuals.

Northgate for instance was listed with 75,771 vehicles, although

they only have 52,900). Interestingly GE, Avis and Hertz rank

lower than 14th position. All of the players larger than

Northgate (other than Arthur Clarke which combines car trading

with fleet activities) are owned by multinationals. Unless I am

wrong, as a general rule multinational companies are less

inclined to lower prices to gain market share (but rather grow

through acquisitions). The argument presented above under (ii)

stand for the players in this group which are smaller than

Northgate.

According to Northgate’s annual reports the hire rate increase in

2012 was 4% (added to 4% increase in 2011) but some customers

moved to smaller vehicles so due to the mix influence the average

hire revenue per vehicle increased by only 3% in the UK. In the

Interim Management Statement (Sep 2012) the management reveals

that ‘‘Hire revenue per rented vehicle has remained stable since

the beginning of the financial year’’.

Conclusion UK - All in all the risk of decline in rental

prices stands but it is rather a ‘‘business as usual’’ risk than

something imminent, posing a threat to Northgate specifically.

SPAIN - In June 2011 Fleet Europe (a good quality publication)

provided an overview of the industry throughout Europe from which

I harvested some data to construct the table below:

Table 2 - Fleets Spain (+ UK and Global, FYI)

________________________________________________________

Vehicles Spain UK Global

________________________________________________________

Leaseplan 85,875 134,718 1,293,000

Arval 80,019 84,558 667,000

Ald 57,125 59,710 848,000

Northgate* 38,400 52,900 91,300

ING** 29,613 49,766 240,000

RCI Banque 10,917 13,422 489,000

Peugeot 10,243 9,500 185,000

Alphabet 7,868 43,947 301,000

Athlon 4,700 - 212,300

Citroen 1,828 21,918 178,000

Sixt - 9,500

119,700

GE (Europe only) - - 245,000

Daimler 2,400,000

_________________________________________________________

Total 326,588 479,939 7,269,300

_________________________________________________________

Source: Fleet Europe, June 2011, No 54

* from the Annual Report 2012

** purchased by Alphabet in 2011

Northgate appears to be the 4th largest player in Spain. I am

inclined to take this as a ballpark ranking not a bullet proof

one. Even if the table above misses some smaller players

Northgate seems to command 8.6% of total market by fleet-size.

According to the Spanish Association of Car Renting (www.ae-

renting.es) the vehicle renting market encompassed approximately

445,000 vehicles in Oct. 2012 and its 23 members, represent

around 99% of it.

The arguments and conclusion for UK above shall stand for

Spain, too. But the market is more difficult currently and

Northgate has already experienced a decline of 2% in rental

prices during April 2012 -- Sep 2012 (latest Interim Management

Statement).

WITHSTAND DECLINE IN USED CAR PRICES?

The Arval used car market index printed in no 58, page 14 (June

2012) of Fleet Europe shows that after experiencing a large

decline in second half 2008/first half 2009 the used car prices

rebounded but they are still below pre-cris level. What happens

next? I think that venturing an opinion on the matter is as

simple as stating the future range for S&P 500.

However, owing to the same no 58 of Fleet Europe’s marathon

interview with the CEO’s of (mostly) top European players we can

learn their opinions on the big picture:

Question: ‘‘ How do you see the residual values?

CEOs’ answers:

Ald -- quite uncertain, to be monitored closely, but no crisis

expected;

Arval -- not expected to recover pre-crisis levels;

Alphabet -- seem to have stabilized since 2010;

Athlon -- the past 2 years showed that risk reward needs to be

included in the leasing price;

Daimler -- stable with a trend to increase;

Sixth -- recovering but not to pre-crisis levels;

FGA Capital -- due to commercial policies on new vehicles RV could

be under pressure (he must mean cheap new cars)

Business Lease -- pressure on vehicles that are less fuel

efficient;

KBC Autolease - residual values stabilized.

No 58 of Fleet Europe available here:

http://en.calameo.com/read/00119162289f9102171de

So, except contrarian Daimler (‘‘stable with a trend to

increase’’) people seem cautions (rather than straight

pessimistic). Prediction are difficult since the materiality lays

with supply and demand (market prices).

Back to Northgate the Chairman and the CEO feel more of the same

as above about 2008/2009 (dreadful) but refer to 2010-2012 as

‘‘Strong used vehicle markets in both UK and Spain’’. In the

annual reports they publish the number of vehicles sold (and

purchased) as well as the prices (there are also the lines in the

cash flow statements that state the amounts paid to purchase and

dispose of vehicles) so more raw data is available for the

investors’ analysis).

Price and liquidity of used vehicles depend up to a certain

extend by a number of factors described under ‘‘Liquidity’’

below: obsolescence, age and maintenance of vehicles).

In the annual report the company also states that ‘‘Higher

margin retail and semi retail channels accounted for 19% (2011 --

22%) of disposals. They did not say the precise percentage of

the retail sales handled through the ’’Van Monster’’ retail

sales network (eight locations in UK and five in Spain).

Conclusion - the risk of decline in used vehicle prices

stands but it is rather a ‘‘business as usual’’ risk than

something imminent, posing a threat to Northgate specifically.

However, given the covenants and the fact that last time they had

to raise equity the risk of decline in used vehicle prices is

the most significant for Northgate. Further reducing debt (₤68m

scheduled in November 2012) might bring some release to the

matter.

LIQUIDITY IN USED CAR MARKETS

Liquidity (demand) in the used car markets depends on used

vehicle finance, car manufacturer programs and scrappage schemes

(‘‘introduced in many EU countries to kick start sales of new

cars in badly depressed new car markets’’. Source: European-Used-

Car-Market-Report-2012). The report may provide more valuable

info to investors (http://www.buckingham.ac.uk/wp-

content/uploads/2010/11/pnc-European-Used-Car-Market-Report-

2012.pdf, produced by The University of Buckingham Business

School).

The report includes the below data:

o The UK new car sales were on average:

…… 2.2 million / year during 2000-2007

…… 2.0 million / year during 2008-2010

a decrease of 17%

o The Spanish new car sales were on average:

…… 1.4 million / year during 2000-2007

…… 1.1 million / year during 2008-2010

a decrease of 23%

o The UK used car sales were on average:

…… 7.0 million / year during 2000-2007

…… 6.5 million / year during 2008-2010

a decrease of 6%

o The Spanish used car sales were on average:

…… 1.6 million / year during 2000-2007

…… 1.5 million / year during 2008-2010

a decrease of 2%

The differences between the new / used car markets are obvious

(and interesting) but for the purpose of this analysis the

notable facts are:

- the used car markets are more resilient to recession

- they are quite liquid in UK;

- but less liquid in Spain -- which is still liquid enough though.

During 2008-2012, in lower volume markets than the average,

Northgate has been able to dispose of:

…… 118,000 cars in UK

…… 79,200 cars in Spain

THE OTHER FACTORS AFFECTING PRICES AND LIQUIDITY ARE:

Obsolescence

I think the company does not run a significant obsolescence risk

since it operates a rather diversified portfolio.

Northgate’s vehicle mix consists of medium vans -- 41%, small vans

-- 34%, large commercial vehicles -- 13%, cars -- 8%, Buses, 4x4 and

other specialist vehicles -- 4% and that the fleet composition by

make in 2012 was Ford -37%, Mercedes -- 20%, Volkswagen -- 16%,

Peugeot -- 15%, Vauxhall -- 4%, Other -- 8%.

Fleet age

The table below presents the average fleet age as presented by

the annual reports.

_______________________________________

Year Group UK Spain

_______________________________________

2012 1.79 1.78 1.79

2011 1.94 1.84 2.08

2010 1.97 1.73 2.27

2009 1.82 1.62 2.04

2008 1.45 1.33 1.58

_______________________________________

I think the company does not run a significant fleet-age risk

since on average the vehicles are less than 2 years old (which

compares with 3.75 years average age of fleet and lease vans at

auction in October 2012. According to Leasing Life: ‘‘ The

average used LCV price at auction in the UK hit £4,447 in

October, up 5.2% month-on-month and 3.3% year-on-year, and just

shy of the two-year high of £4,483 reached in January this year,

according to the latest report by British Car Auctions.

Although values were up in all sectors, ex-fleet and lease

values hit a record high of £5,201, up 3.2% month-on-month and

1.7% year-on-year. Retained value against Manufacturer

Recommended Price was up by a point on September to 32.6%.

The October average age of fleet and lease vans at auction was

45.24 months; average mileage was 72,352, and sale against CAP

Clean was 101.52%’’). Source: http://www.vrl-financial-

news.com/asset-finance/leasing-life/issues/ll-2012/ll-230-nov-

2012/fleet-friday-jobs,-money-and.aspx

Maintenance regime

The company claims to have ‘‘improved vehicle maintenance

regime’’.

Also Northgate’s ’’Van Monster’’ retail sales network (eight

locations in UK and five in Spain) might be quite useful for

adding to the liquidity of its fleet.

DOWNSIZING THE FLEET MIGHT AFFECT DISCOUNTS FROM MANUFACTURERS

During 2009 -- 2012 Northgate purchased on average 29,725 vehicles

yearly, about 30% of each years’ fleet. The average purchase

price was ₤10,774/vehicle (Value of vehicle purchases as stated

in the cash flow statement/no of purchased cars).

Considering the mix (by make) of the fleet described above as a

proxy for the purchasing patterns the company buys yearly close

to 5,000 cars from 3 manufacturers (Mercedes, VW, Peugeot, close

to 11,000 cars from one manufacturer and about 3,500 cars from a

few other manufacturers. Northgate is not a ‘‘whale’’ like

Leaseplan, GE, etc but it fares better than +400 (smaller)

companies in UK while it is (probably) the fourth largest fleet

operator in Spain. The fleet focusing on light commercial

vehicles might provide a slightly higher relative weight (than

apparent at the first sight) in manufacturers rankings of buyers

of such vehicles.

As a matter of mapping the average purchase price of

₤10,774/vehicle realized by NTG during the last five years

compares to the following retail prices (from the current

websites of manufacturers):

Ford Transit Connect - from £10,620

Ford Transit Van - from £17,995

Mercedes Vito - from £17,680

Mercedes Sprinter - from £20,620

VW Caddy -- from £12,860

VW Transporter -- from £16,960

VW Crafter -- from £20,800

Conclusion - Unless the fleet size falls dramatically, which

appears not to be the case anymore, Northgate will not be

disrupted by suddenly decreasing discounts but will stay more or

less in the same ‘‘discount brackets’’ and faring better than a

lot many smaller competitors and worse than the majors.

THE RISK OF INCREASED COST OF DEBT

The current average cost of debt is 7.1%. If covenants are

breached additional costs may occur. The company is embarked on a

deleveraging program (next tranche of £68m to be paid back in Nov

2012) which will contribute to mitigate this risk.

RISK OF IRATIONAL MANAGEMENT - This management team acted

rationally during 2009-2012 and has recent memories of difficult

times. Odds seem higher for ration to persist (no extravagant

ideas like empire building for instance are signaled by current

‘‘leaner but fitter’’ behavior). They seem to believe there are

hopes for organic growth in UK given a few announcements like:

- May, June-12, company announces 25% increase in its sales

force and promotion of new Head of National Sales;

- Nov-12, Jon Tobbell joins as the National Sales and Marketing

Director. He apparently achieved 50% revenue increase in his

former role at Hermes UK (part of the European group Hermes

Logistics Group, which is owned by German mail order and

catalogue retail giant Otto Group). He ‘‘hopes to achieve

comparable results for Northgate’’;

- New Supply Chain and Business Development Director, New Area

Sales Manager northeast have been appointed;

- Re-launched products -- Northgate’s product addressed to the

retail market (vans for personal use) was, at 31 Oct-12, on track

to double (to £4.4million) as compared to last year.

A REVIEW OF THE GROWTH OPPORTUNITIES

Rent Revenues -- There is little factual indication yet that

rental revenues will grow unless the UK and Spain’s economies

grow as well. The rental rates have been increased during 2011,

2012. But this year UK remained stable (April - September 2012)

and in Spain rates have been decreased by 2%. Still not an

enticing environment.

The company believes there are hopes for organic growth, has

prepared for it and we shall see.

Disposal Revenues -- The company seems to be doing the right

things (fleet mix, fleet age, maintenance) which is good.

Materiality is with supply and demand so except offering proper

vehicles there is not much else they can do.

Operating profit (EBIT) -- shall improve assuming that:

- the savings in staff costs resulting from the decrease in the

number of personnel will be preserved. That represented an

economy of ₤1.6m (April 2012) vs. April 2011;

- the exceptional administrative expenses such as restructuring

costs 2012 - £7m, 2011 -- £5.6m will disappear. The net impairment

of receivables expensed in COGS was also eating out of EBIT £4.9m

in 2012, and £5.5m in 2011. Should these phenomena loose

significance, as they are expected to, EBIT might grow.

Profit before tax -- interest costs are substantial currently.

Paying back £68m of US loan notes (8.8% interest) in Nov 2012

will lower the interest expense by £5.9m for next year. So PBT

could grow by £19.4m if all the above mentioned expenses

disappear;

Net Profit -- regular taxes will start to be paid, too, in 2013. A

deferred tax asset which amounted to £17.2m in 2009 has already

been consumed to a large extend.

Catalysts:

- acquisition by a major player during 2013;

- faster deleveraging;

- debt refinancing at lower interest rates;

- dividend payments.