Marshall Motor Holdings Plc H1 in line, no change to forecasts

Marshall Motor Holdings Plc (LON:MMH), one of the UK’s leading automotive retail and leasing groups, has today announced its unaudited interim results for the six months ended 30 June 2017 (“H1”) (the “Period”). Zeus Capital also comment below.

Financial summary

Financial highlights

· Underlying profit before tax up 32.9% to £18.6m (H1 2016: £14.0m)

· Record results from retail segment: PBT growth of 38.2%

· Interim dividend of 2.15p per share (2016 interim dividend: 1.80p)

· Adjusted net debt (excluding leasing loans) at 30 June 2017: £35.1m. Adjusted net debt/EBITDA: 0.7x

· Significant balance sheet capacity underpinned by £112.5m of freehold/long leasehold property.

· Net assets at 30 June 2017 of £2.04 per share (30 June 2016: £1.78 per share)

Operational highlights

· Good like-for-like3 revenue growth of 6.7%

· New car retail unit sales up 32.7% (like-for-like down 0.4%, outperforming UK new car retail market which was down 4.8%)

· Used car unit sales up 39.7% (like-for-like up 5.8%)

· Aftersales revenues up 43.1% (like-for-like up 2.3%) driven by a strong service performance

· Ridgeway acquisition delivering to plan and making a material profit before tax contribution of £5.4m (H1 2016: £1.0m)

· Continued good levels of profitability in the leasing segment with further fleet growth and a number of new customer account wins.

· Focus and control of operating expenses at 9.7% of revenue (H1 2016: 10.1%)

· Further investment in the Group’s property portfolio with £12.3m retail capital expenditure during the Period.

Daksh Gupta, Marshall Motor Holdings Plc Group Chief Executive, said: “The Board is pleased to announce another period of record trading, underpinned by like-for-like growth together with the contribution from Ridgeway which the Group acquired on 25 May 2016. In the two years since listing, the Group has successfully completed a number of retail acquisitions transforming its scale, geographic footprint and franchise portfolio as well as significantly growing its profitability. This, together with a strong balance sheet, leaves the enlarged Group well positioned to execute its growth strategy moving forward.”

1 Underlying profit before tax is presented excluding non-underlying items (see note 5)

2 Adjusted net debt excludes £65.9m asset backed finance relating to the leasing segment (2016: £60.7m)

3 “Like-for-like” is defined in note 1 to the interim financial statements

Zeus Capital Comments:

Marshall Motor Holdings has delivered a solid set of interim results this morning which are in line with our expectations. As flagged in the company’s trading update in July, a good LFL performance together with a strong performance at Ridgeway has delivered headline adj. PBT up 32.9% YOY. We are maintaining our forecasts following this update (albeit September remains key to full year performance). While market conditions remain uncertain the valuation remains compelling and more than factors in any potential earnings risk. Based on near term multiples (2017E P/E of 5.1x) and in the context of £112.5m of property freehold/long term leases we believe the current market value is underpinned.

H1 results: Revenue is up 43.7% YOY at £1.18bn with LFL growth of 6.7% and a good contribution from Ridgeway. Gross margins saw a 30 bps decline driven by weakness in used car margins as previously flagged, albeit this was partially offset by leveraging the overhead with operating costs as a % of revenue falling from 10.1% in H1 2016 to 9.7% in H1 2017. Underlying EBIT was £22.1m vs. £14.5m showing strong progress. Interest costs were ahead YOY at £3.9m (H1 2016:2.4m) reflecting increased trading activity across a larger group, albeit underlying PBT comes out at £18.6m which is a 32.9% increase YOY of which Ridgeway made a material £5.4m contribution (H1 2016: £1.0m). Underlying EPS is up 33% to 18.6p per share (H1 2016: 14.0p per share) the dividend is up 19.4% on H1 2016 at 2.15p per share. Net debt was up YOY to £101.1m (£35.1m ex. Leasing debt which equates to 0.7x EBITDA) up from £93.1m in H1 2016 (£32.4m ex. Leasing debt) as the company invested in growing the leasing fleet.

Key themes: Following the Ridgeway acquisition, the portfolio is weighted towards premium brands, meaning the company achieved outperformance in new volumes. New volumes at the company were -0.7% on a LFL basis vs an overall market of -1.3% (-4.8% excl. self-registrations) as premium continued to take share from volume brands. Used volumes remained robust, up 5.8% on the previous period, although the group notes on going margin pressure in this segment. Aftersales saw improvements in both volume (+2.3% on a LFL basis) and margin which came in at 42.9% (2016 H1: 42.6%). The leasing business maintained good levels of profitability, and the company have invested in the leasing fleet growing it to 6,290 vehicles (+3.5% YOY).

Forecasts: We are maintaining our FY forecasts for now. While it is early to predict September volumes we would expect the order book to be building to plan. Management remain cautious on the UK vehicle market for 2017 as a whole, which is consistent with our current views at present. Trading conditions in September will remain critical in how the FY outturn plays out for 2017E.

Valuation: While there is growing uncertainty across the sector, we believe this is more than priced into the shares as it trades on a prospective P/E of 5.1x based on our forecasts, with a dividend yield approaching 5%. The current market capitalisation is also more than backed by freehold assets (£112.5m freehold and long leasehold assets at 2017 H1 balance sheet position). Overall, we believe the valuation is compelling in the context of a business that continues to deliver against a tougher trading backdrop.