Darlington-based vehicle hire and accident management group Redde Northgate (REDD) has come a long way in the past few years.

From historically being a van sales and rental firm, the group now offers fleet management, vehicle repair, service and maintenance, claims management and even the installation of electric vehicle chargers.

By providing its customers, who include large public and private-sector operators, with a whole range of mobility services under one roof, the group is generating a network effect which is leading to more revenues and higher margins.

We think the market has yet to cotton onto just how big the upside could be for the business and the shares, making this a great time to buy.

Turnover for the year to April was up 12%, but a big drop in vehicle sales – which was deliberate given the strength of rental demand and the shortage of new vans – hides the fact underlying revenues (excluding vehicle sales) were up 24% thanks to higher prices, higher volumes and new customers.

More impressively, earnings before interest and tax jumped 80% thanks to higher margins and a leaner cost base, while cash generation rose 54% and return on capital employed leapt from 9.5% to 13.9%.

By being able to offer a single point of contact for end-to-end services, the group is winning multi-year contracts with customers such as Tesco (TSCO), Admiral (ADM) and Saga (SAGA), which will kick in next year.

While the hire business goes from strength to strength, with no sign of a drop in demand post-pandemic, the vehicle and accident management business is back to 90% of pre-pandemic activity levels and is also winning new customers.

Chief executive Martin Ward sees an increasing number of companies deciding to outsource their fleet management, moving from an owned model to a utilisation model, while taking advantage of the firm’s managed solutions.

Meanwhile, in the accident management and repair sector, insurers looking to lower costs while improving responsiveness and the customer experience are attracted by the group’s national coverage and in-house repairs.

At the current price, the stock trades on just eight times last year’s reported earnings of 41p per share and seven times next year’s estimate of 48p, making it one of the cheapest stocks in the FTSE 250 index.

The group looks financially sound, too. Even after investing heavily in new vehicles to grow its business, it launched a £30 million share buyback in March and is paying a 21p dividend per share – equating to a yield of 6.25% – which is twice covered by earnings.

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