Rental giant Northgate, which has some 68,000 vehicles on its books here most of which are light commercial vans, has issued a severe profits warning.

It warned its shareholders that it expects that its profits for the remainder of the financial year will be “significantly lower than market expectations”.

As a result its shares fell in value by over 45%.

The company blames the low values being paid for used vans as well as a fall in demand for rental vehicles.

Northgate’s management board is now conducting a review of the business.

This is expected to lead to the company writing-off approximately £54 million relating to the acquisition of two businesses in Spain, along with approximately £32 million of goodwill in relation to its UK hire business.

In addition, it is anticipated that other assets - mainly its vehicle fleet - will be written down by around £60 million.

The company has debts of over £860 million.

At the start of this month, Northgate also increased its rates of depreciation for new vehicles purchased to approximately 20% per annum.

In its interim statement, which covers the last four months, Northgate said “conditions have deteriorated…

"Furthermore, interest rates and exchange rates have changed considerably since December.”

Exchange rates will impact on the company as it is a major player in the Spanish vehicle rental market.

Late last year, the company reported that it was already getting tougher to do business.

It said “We had experienced a marked fall in residual values of used vehicles and had seen a reduction in the number of vehicles hired by existing rental customers, the latter impacting the utilisation rate.

"As a result, we expected to see a weaker performance in the second half of the financial year.

“Since then, trading conditions have deteriorated and the decline in vehicle residual values in the UK has continued, albeit at a lower rate.

"Whilst market data is not as readily available in Spain, our own experience would indicate residual values have fallen by a similar degree to those in the UK.

"We do not expect to see any recovery in used vehicle prices until later this year, at the earliest, in both countries.”

This prediction that a strengthening of LCV residual values will not happen for several months is backed by industry analysts such as CAP, which has confirmed it does not expect to see used vehicle prices picking up until the final quarter of this year.

However, according to the latest auction results from BCA, a recovery in used van prices could already be happening.

This recovery will act in Northgate’s favour: because of the fall in demand for rental vans the company is de-fleeting as quickly as possible.

“We expect to see existing customers continuing to reduce the number of vehicles they hire in the near term.

"In response to this we are de-fleeting as quickly as possible to tighten up utilisation until demand starts to recover… short-term profitability will be impacted while we bring the vehicle fleet size into line with customer demand.”

The company is working to cut costs.

“We have sharply reduced vehicle purchases, significantly increased vehicle disposals and taken steps to rationalise the cost base,” it said.

“We have continued with measures set out in the interim statement including headcount reduction, extension of vehicle age profile, continued reduction in vehicle purchases.”

Late last year Northgate said it would lay off 10% of its workforce – about 380 staff.