On 30^th June Northbridge announced the £9.8 million purchase of Australia based Tasman Oil Tools and a £7 million placing which transforms this UK based industrial equipment supplier in terms of scale. But Northbridge is not merely an acquisition play. The Tasman announcement came just 16 days after an upbeat trading statement in which Northbridge revealed that trading in the first half of calendar 2010 had improved strongly compared to 2009 and that it had also secured two new major contract wins. Interims will be published in September but it is already clear that the one off and macroeconomic issues that tempered 2009 results have been resolved but this, and the opportunities opened up by Tasman, are far from factored into the share price. This is primarily a growth/acquisition investment play and the proposed acquisition of Tasman is a demonstration of the management teams’ ability to deliver on this value building strategy.

Tasman is based in Western Australia and specialises in the rental of equipment for the onshore and off-shore oil industry throughout Australia. From day one this is an earnings enhancing deal for Northbridge. The initial cash consideration is just over two times EBITDA for the year to June 2010 and the deal transforms Northbridge into a business which clearly has critical mass. We are initiating our coverage at 133p with a stance of strong buy and a target price, based on a multiple of 8 times forecast 2011 earnings, of 242.5p.

Northbridge Industrial Services was incorporated in 2007 to acquire and build a specialist industrial business which hires and sells equipment to a non-seasonal customer base including utility companies, the public sector and the oil and gas industries. The longer term strategy is to become a complete outsourcing provider involving a higher margin service/ maintenance element to the equipment provision. Despite a small dip in 2009 underlying earnings, significant corporate progress was made last year as two businesses were acquired, all fitting the ongoing acquisition profile of £1-10 million turnover supplying a geographically diverse, non-cyclical customer base with a potentially strong element of ongoing service work.

Tasman Oil Tools, based in Perth, Western Australia, is being acquired for up to £9.4m, of which £6.8m will be paid in cash on completion and the remainder in a mixture of shares and deferred consideration. A £7m placing at 125p has brought in new institutional shareholders and the company has secured a £3m debt facility. Management expects the acquisition to be earnings enhancing from the outset. Tasman, formed in 1980 by the current vendors provides services to customers in the oil and gas and mining industries, renting out oilfield tools and drilling equipment. Rental contracts can run for a few weeks to several months and there is usually a high level of repeat business. There are some 4,000 products available, including drill strings and collars, blow-out preventers, stabilisers, mud pumps, power tongs, torque wrenches and wash-down units. Tasman also sells consumables and spare parts to drilling companies. These include corrosion inhibitors, spill kits and lubricants. The company’s workshop in Perth provides a service and repair facility for drilling companies for the maintenance of their own equipment. It is complementary to the rental side in that Tasman can rent out replacement tools to customers while their own are being repaired.

Until the Tasman deal, Northbridge’s latest acquisition came in April 2009 when it picked up a 66.67% interest in Tyne Technical Equipment Rental Services. This is a Dubai registered company formed in 2004 and its principal business is the rental of generators and the sale of associated services to the infrastructure and the oil and gas industries in the United Arab Emirates where a number of new contracts have been won during the past year. The total consideration paid was £170,000 comprising £62,000 in cash and 80,000 Northbridge shares at 135p. Northbridge will acquire the remaining 33.33% of the company on 13 April 2011 for a price based on a multiple of net profits in the preceding twelve months, subject to a maximum cap of £680,000 (total £850,000). In July 2009, Northbridge acquired a specialist air compressor fleet based in the UK from the manufacturer Sullair Corporation. The specialist applications for these compressors include pipeline dewatering and pressure testing in the oil & gas industry. The cost of the hire fleet was £1.2 million of which 90% was funded by a hire purchase agreement with Lloyds Banking Group.

With an estimated net debt of £5.7 million (less than one year’s forecast profits) there is clear potential to make further complementary acquisitions without issuing equity, so increasing the product offering to the group’s growing international customer base. There are clear advantages of increased scale as it improves the leasing funding options available to the group as well as improving net profit margins from the current 17.4%. As Northbridge achieves critical mass we believe that it will itself become a potential acquisition target for larger industry players such as the £1 billion capitalised Aggreko.

Excluding Tasman, the two largest subsidiaries of Northbridge International are Crestchic and Northbridge Middle East (NME) which was established in 2007. Crestchic designs, manufactures, sells and hires load bank equipment which is primarily used for the commissioning and maintenance of independent power sources such as diesel generators and gas turbines. The need to test and maintain standby and independent power systems, and the increasing reliance on power critical technology used within the banking, medical, marine and defence industries, has resulted in a continued strong rental demand for Crestchic's products and associated services. Additionally, Crestchic is winning new sales because in some Middle East countries there is a background of an increasingly unreliable power supply. NME has become an agent for Crestchic products and has delivered steady growth since its formation. The portfolio of products offered by Northbridge has been enhanced by the acquisition of Tyne Technical Equipment. The winning of the two major projects announced on June 14^th, with both new and existing customers, and which will extend through the second half of 2010 and into 2011 underpins our profit forecasts. The first project is in South Korea with an international oil company and involves the rental of load banks, transformers and generators to a project which will continue into the first half of 2011. The second project is to a new customer in the Middle East and involves the sale and rental of load banks and transformers to a cement plant in Syria. The minimum total revenue for these two projects, which take the Group into both new activities and new markets, will be $3 million.

The recent trading update also reported progress being made particularly as the mix of revenue is moving strongly towards the higher margin rental / service revenue model. This is a result of the substantial investment of £4.4m made in the hire fleet last year and an additional £1.2m as development investment into the acquired compressor fleet which has helped to continue to expand the load bank, transformer and generator hire fleets. The results for the six months to June 30^th 2010, to be announced in the week starting Monday 20^th September should report substantial growth in profits and turnover and during the coming year we would anticipate further bolt-on acquisitions to build on the Tasman deal and the evidence is that the management team have a clear ability to make post acquisition synergies work. The fall in sales and earnings in 2009 was due to delaying of contracts by some customers which has corrected itself and indeed will serve to boost this year’s numbers. We believe that the current rating is a throw back to the one off problems of 2009 and fails to discount the strong growth potential from the existing business and also the upside generated by the Tasman deal. At 133p we initiate our coverage with a stance of strong buy and a target price – based on a multiple of eight times forecast 2011 earnings – of 242.5p.