Northern Bear hugs regeneration

Graham Forrest, the Geordie accountant who runs acquisitive building services group Northern Bear, surprised City fund managers with two forecasts on the eve of the Newcastle-based company’s AIM float at the end of 2006. He told them he felt ‘a new draft coming in house-building’, then the company’s principal business, but he also said the company was within sight of achieving annual turnover of £50 million or more.

Despite the paralysing of the property market by the credit crunch, Northern Bear looks poised for further expansion after making £2.9 million pre-tax profits on a turnover of £32.2 million in the 12 months to March, its first full year since incorporation as a public company. Brokers now expect pre-tax profits for 2008-09 of £4.3 million on a turnover of nearly £43 million.

Chaired by seasoned entrepreneur Jon Pither, the company has shifted its emphasis from normal house-building to local authority housing regeneration. The aim is both to reflect cyclical market changes and to exploit current long-term government and local authority programmes.

Expecting a bullish AIM classification move from construction and materials to support services, chief executive Forrest says the strategy is to buy ‘mature and profitable’ businesses in the North East of England, with an emphasis

on local authority housing regeneration. Last month, Northern Bear bought A1 Industrial Trucks and plumbing group D J McGough for up to a combined £6.7 million. Forrest says that the company has not only shifted its emphasis from house-building to regeneration, but is looking to step up its organic growth in fields such as roofing and asbestos removal.

He says that the policy is to steer clear of turnarounds and go for established, successful businesses. A1 Trucks and D J McGough are the 11th and 12th acquisitions made so far by Northern Bear, which aims to buy these companies for no more than three times earnings and to bolt in successful management by paying around 25 per cent of the price in Northern Bear shares, insisting on minimum contract periods for vendors and offering target-based bonus payments thereafter.

This method, according to Forrest, keeps the vendors motivated in the same direction as head office. He describes them as ‘canny Geordies who eat, sleep and breathe their businesses and don’t go in for flash cars or offices’, adding that they often suggest other suitable acquisitions for Northern Bear.

Once the company makes an acquisition, explains Forrest, ‘we let them get on with it’, subject to regular management and managing directors’ meetings. The acquired companies keep their individual names and brands.

Admitting that acquisition opportunities recently received a one-off boost from business founders selling out before the government’s April capital gains tax increase came in, Forrest argues that Northern Bear can enhance acquisitions’ long-term prospects and performance by making them ‘part of the family’. Cross-selling opportunities and economies of scale from the discounts available on central purchasing by the enlarged company, worth up to 25 per cent in some cases, are among the advantages he cites.

As the company grows, Forrest says it is looking for larger acquisitions – typically with a turnover of around £1 million – and that these are easier to find as ‘word gets out’. The company is also involved in new school-building programmes and is stressing organic growth, partly because that is what City institutions now like to see.

Northern Bear earned 14.3p a share in its last financial year and proposes a 2p final dividend, taking the full-year payout to 3p a share. Forrest adds that Northern Bear is 39 per cent geared and foresees no need to raise new equity in the near future, as well as proclaiming that directors intend to pursue an ‘aggressive’ dividend policy.

House broker St Helen’s Capital predicts earnings of 18p a share for the current year. The tightly held shares were floated at 88p in December 2006 and reached 173p last July. They now trade at 109p, which seems a grudging rating.