Vertu Motors plc (LON:VTU) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: Mike, it looks like a great set results from Vertu Motors, what were the key highlights in your opinion?
A1: So, the results were very strong, they beat our forecast by 37%, that was our initial forecast when we reinstated forecasting October. We’ve then steadily upgraded those numbers and they beat our last forecast by 7%.
Clearly it was an unprecedented in a complex year for the group, the outperformance is come in lots of different way. Costs and efficiency has been one key trend for sure, they’ve also outperformed the markets in terms of volume activity and they’ve done very well on cash generation and debt reduction as well, over the period.
Q2: There was plenty to go on in the update, but what trends did you note?
A2: I think in terms of the used car market, obviously margins were very strong there, we’ve seen the supply shortages and that’s come through in margins, but also, they did deliver good volume growth given the context of the market there as well. New car market was a little bit tougher, but they outperformed that and I think aftersales was a robust performance as well.
But as I said before, a big delta of the outperformance is what they did on operating expenses and even when you strip out the government support that they did, they still delivered £10 million of annualised cost savings. So, the management team really dug into the detail of the business and drove efficiencies and cost saving.
Q3: Now, you mentioned earlier that they performed better than your expectations so does that mean that there’ve been changes to your forecasts?
A3: We have updated our forecast to reflect what they’ve delivered, we’re assuming now management to guide them between £24 and 28 million PBT in 2022, we’re looking at £26 million at the moment, that’s a strong upgrade on the number that we had in the last year. We’re assuming £28 million for the following year as well.
We are mindful of the supply shortages driven by global semiconductor shortages at the moment so we’ve been mindful when we’ve been putting those numbers together. It still equates to a 42% of upgrade to adjusted PBT in ’22 and bout 18% in 2023 as well so very strong upgrades.
Q4: Finally, what are your thoughts on Vertu Motors in terms of valuation?
A4: If we take it in a couple of steps really. First step, this business now has tangible net assets per share with 50p and the shares are still below that at the moment so I think that’s a very conservative starting point. We’ve then looked at our kind of intrinsic value modelling and we’ve looked at the business on a similar parts basis, DCF basis, and also mid cycle earnings multiples based on our current forecast.
The upshot of that analysis is we’re comfortable around 75p however, I think if you were to take a longer term view, and if you look at the historic peak earnings in the business and then look at the balance sheet capacity for investment in organic activities and in acquisitions, we think a blue sky target earnings of about 8.5p is achievable over the next couple of years. If we put that on a PE of 12 then we think that provides a sensible long-term price target of 102p per share.
So, there’s a lot to go for in this business, that’s kind of clearly improved and obviously developed itself during the pandemic so we think it’s very exciting times ahead for the company.
