Redde

Description

Redde provides accident management support, legal services, fleet management and policy fulfilment services. It prides itself on great customer service, which it consistently delivers. Previously known as Helphire, the company saw a period of rapid growth in the years leading up to the financial crisis as vehicle replacement services for not-at-fault drivers became more common-place. However, its business model of funding the cost of the replaced vehicle from inception to settlement of a case, put increasing pressure on its balance sheet, as the claims handling process started to lengthen. A new management team has down-sized, restructured and successfully returned the business to a stable, profitable growth trajectory.

Investment case summary

Redde is a good company that generates lots of cash. The company has been delivering strong growth as it builds a leading position in its core markets. It has a strong balance sheet and trades at an extremely low valuation. Although it has a concentrated client base, technology investments have helped to embed Redde within its customers’ business models and reinforced its reputation as a “leading partner of choice” in its industry. Meanwhile, the company continues to execute its GPSii strategy (Growth, Profitability and Sustainability), making progress towards its aim of building a core “one stop shop” offering.

The loss of a contract with a major UK insurer in March 2019, took a further toll on Redde’s share price. However, management demonstrated reassuring discipline in not chasing this low margin contract at the expense of profit.

Ask a question about our investment in Redde

Fund exposure
Income Focus Fund 3.79%
Equity Income Fund 1.98%

As at 28 February 2019

Segmentation
Geography United Kingdom
Industry Financials
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Lost contract

Redde has today announced that it has not renewed a contract with a major UK insurer.

This was a large contract, accounting for almost a fifth of revenues. It is a low margin piece of work, however, so it accounts for a much smaller proportion of profits (less than 10% of next year’s profit forecasts). There are several things that Redde can do to reduce its cost base too, to minimise the financial impact of the loss of this contract, including flexing the size of its fleet.

On the face of it, losing a large contract never sounds like good news. It is helpful to understand the industry context in which the negotiations have taken place, however, and we are reassured that Redde’s management team has demonstrated reassuring discipline in not chasing this low margin contract at the expense of profit. The share price had already weakened in February following its interim results, and has slid further today on this news.

Earlier this week, we had a good and frank meeting with the CEO and FD. The shares now trade on 7.7x current year forecast earnings and yield more than 11% (source: Bloomberg). This is a very, very cheap valuation, which will make Redde look like a very attractive acquisition candidate.

Stephen Lamacraft
8 March 2019

Interim result

A disappointing reception to Redde’s results today, with the shares closing -14%. Despite impressive turnover growth, the dividend growth that we have become accustomed to, has been halted, due to the increasing working capital requirements of the business which stem from its recent growth. Given the lack of dividend cover (it is currently 1x covered by cash), the board has elected to maintain the dividend, in order to increase cover and retain more capital for internal investment.

Meanwhile, gross margin reduced due to a combination of factors, such as an increase in the mix of lower margin activities, higher levels of commission payments to referral partners and higher fleet costs related to new emissions and fuel consumption regulations (WLTP) which came into force in September 2018. Some of these factors should be seen as temporary, but it does feel as though there is broader pressure on margins within the company’s concentrated customer base.

Nevertheless, this remains a modestly valued, cash generative business, which retains many attractive characteristics. We have already spoken to management on today’s results and have a meeting with the CEO, Martin Ward, next week, to further explore the prospects for continued dividend growth, despite the increased margin pressure they are experiencing.

Stephen Lamacraft
27 February 2019

Exceptional full-year results

Today, Redde reported a very good set of full year results, demonstrating strength across the board. Its revenues were up 11.6%, helped by growth in the number of cars hired on credit and in the number of repairs undertaken. Also, the company’s adjusted earnings per share increased by 17.8%, while its final dividend grew by nearly 10%. That said, a less positive aspect was the slight increase in debtor days, suggesting that cash is being collected from debtors over a longer time frame than in 2017.

Overall, we view this set of results as very robust and it reflects just how well managed the business is – its GPSii strategy (Growth, Profitability and Sustainability) continues to deliver in spades. Importantly, the company has numerous irons in the fire to sustain the levels of growth we have become accustomed to. Whether gaining share in existing claims management, vehicle repair or car hire services, the evolution to a core “one stop shop” offering continues apace. Its valuation however does not reflect these attractive qualities, with its shares continuing to offer a very attractive 6.8% estimated dividend yield, at the time of writing.

Stephen Lamacraft
6 September 2018

Continued double-digit growth

A good set of financial results from Redde today, which confirms the continued delivery of double-digit growth in revenue, operating profit, earnings and dividend. The company has seen particularly strong growth in credit hire, driven primarily by a large new contract, won in late 2016. Even excluding this contract, the company is growing at a faster rate than the market, indicating continued market share gains.

The significant new contract win in late 2016 has also distorted working capital and cash conversion (down from 89% last year to 47%) for the time being, but this should normalise through the rest of 2018. The company’s outlook statement, which confirms that underlying growth rates have so far been maintained into the second half of its financial year, is encouraging in this respect.

With a dividend yield of more than 7% based on current year’s forecasts, the shares continue to look very attractively valued.

Alex Correia
1 March 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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