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Northern Bear: A mistake – time to sell

By Tom Winnifrith | Tuesday 16 October 2012

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Northern Bear (NTBR), a UK building services group, is a most disappointing recommendation from my past. I first recommended the shares at 71.5p in December 2008 and though they have recovered a bit from lows of 8p earlier this year, they currently trade at 11.75p having been buffeted by fears about the company’s balance sheet and its operating environment. I can only apologise for what was a duff tip. In the following I take a renewed look at the investment case.

Northern Bear’s last update on its performance was its 30th July released results statement for its year ended 31st March 2012. This saw the company report a strong increase in revenue, though noting “due to significant margin pressure in all markets and a change in the group’s sales mix, gross profitability did not increase at the same rate”. The numbers showed an adjusted pre-tax profit of £1.21 million, down from a prior year £1.66 million, on revenue of £36.41 million. At the year end net debt totalled £7.42 million, net current liabilities £3.27 million and net tangible liabilities £3.49 million. The company added:

the uncertain macroeconomic conditions have continued to dominate the trading environment for our businesses. Whilst public sector expenditure programmes continue to provide the group with a significant level of orders, there are constant delays between winning contracts and commencing work on site which makes predicting turnover levels more challenging… all businesses within the group continue to operate in extremely tough market conditions.”

Given the wholly UK exposure, such an outlook is unsurprising and the shares have in fact nudged higher since the results release. The current market cap is just £2.1 million, which added to the net debt gives an Enterprise Value of £9.51 million. In the context of last year’s underlying post-tax profit of £0.863 million and the challenging trading environment, this does not look especially attractive. Net interest costs remained well covered by underlying operating profit (3.7x), the company emphasised its “bankers have remained supportive” and should macro economic conditions improve the company should be able to materially increase profit from recently reported levels. However, the domestic exposure and lack of earnings visibility concern me given the current macro economic picture and mean I would not be confident holding the shares from here. I apologise for having called this one horribly wrong to this point, but would now sell. There have to be safer bets with less obvious downside risk and clearer upside potential.

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith

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