If you’re excited by the investment opportunities afforded by successful consolidation plays, then take a look at Northbridge Industrial Services, which is striving to build through acquisition an aggressive business in the industrial services sector.

The company’s ambitions are in good hands as the chief executive is Eric Hook, erstwhile boss of air conditioning and heating equipment rental business Andrews Sykes.

He has therefore great experience of running public companies with acquisitive strategies.

The first move to build Northbridge into a significant industrial equipment business was made in March by the purchase of Crestchic for �6.7 million. This was financed by a share placing at 100p a share when Northbridge joined AIM.

Crestchic designs, manufactures and rents load bank equipment. This is used to test diesel generators and gas turbines when they are installed or maintained.

Burton-on-Trent-based Crestchic has been going for more than 20 years and has built a solid base. It is an international business with revenues coming from Russia, India, South Africa and the Netherlands. As well as the sales and rentals, Crestchic can also provide help with setting up its products.

The markets for its wares are buoyant. Demand is strong from the shipbuilding sector, where the load banks are used to test turbines on ships, and the oil and gas sector. The company’s turnover is made up of 70 per cent sales and 30 per cent rental revenues.

Management would like rentals, which are more profitable, to increase to nearer 50 per cent of turnover and it is investing in the hire fleet.

There is enough spare land available to develop the factory and double its capacity.
Elsewhere, Northbridge is looking for additional businesses that have a non-cyclical customer base and a profitable niche market.

Testing, power generation and temperature control are areas that are likely to offer the most interesting acquisition possibilities.

The ideal size of business would have an annual turnover of between �1 million and �10 million. Local family businesses are the likely targets.

The reasoning behind the acquisition strategy is that these areas are moving towards the outsourcing of non-core services. Existing distribution channels may be able to sell the newly acquired products.

The kind of equipment that Northbridge would provide requires skilled operators and this helps to make it more difficult for new competitors to enter the markets.

Northbridge’s figures for this year will be complicated by the fact that Crestchic was bought at the end of March and will only be included for nine months. The reported interim figures to June 2006 included a three-month contribution. They showed
a profit of �226,000 on turnover of �2 million.

Like-for-like interim figures show turnover 36 per cent ahead at �3.7 million. The operating profit before any group overheads was �685,000.

House broker Charles Stanley estimates that pro forma full year profits will increase from �1 million to �1.2 million on turnover just over one-fifth higher at �7.5 million.
Northbridge will pay a final dividend, too. The cash generative nature of the business means that it will be able to do this and invest in growing the operations.

Although net debt was modest at �349,000 at the end of June, Northbridge will probably finance any acquisition predominantly with shares as well.

The price has risen by more than one-fifth since the half-time results were reported in September. While this means that Northbridge is no longer as cheap, it does have the positive effect of making it easier to make earnings-enhancing acquisitions.

Even after the rise, the shares are trading on less than ten times forecast earnings for 2007 and that would fall to a forecast multiple of less than nine in 2008. That looks too cheap.