Vertu Motors plc (LON:VTU) has released a trading update increasing FY22 underlying PBT guidance to “no less than £70m”, up from prior guidance of “at least £65m”. This was driven by new vehicle supply being better than expected in October and November, sold at enhanced margins, and a continuation of above-normal used car margins. We increase our FY22 forecasts by 7.7% to £70.2m to reflect this. Our profit forecasts for FY23 and FY24 are unchanged, but even at the more normal levels of forecast FY23 profit, we see ratings upside for Vertu. Recent bid activity in the sector highlights the current industry undervaluation and supports our intrinsic value estimate of 85.9p per share, a 25% upside to current levels.
- Trading update: Vertu’s positive trading update has indicated that underlying PBT in the year to 28 February 2022 will be “no less than £70m”. Whilst there has been continued disruption to new and used vehicle supply, the supply of new vehicles was better than envisaged in October and November, and was sold at enhanced margins. Despite some recent normalisation in used car prices, Vertu Motors has also retained above-normal used margins. The Group has made progress in responding to the UK-wide labour shortages, having rolled out their enhanced reward packages and reduced the number of live vacancies, albeit these remain above historic levels.
- Forecasts:We have upgraded our forecasts in line with Management’s guidance, increasing FY22 PBT by 7.7% to £70.2m. We have increased our assumptions for new unit sales, average new selling price, and GPPU for new and used vehicles. Our FY23 and FY24 forecasts remain unchanged at this stage, except for the flow-through impact of higher net cash at the end of FY22 and the positive EPS impact of share buybacks. We think it is likely that strong vehicle margins will extend into FY23 but we are mindful of cost inflation offsetting this.
- Sector consolidation: Last month Constellation Automotive made a 400p per share cash offer for Marshall Motor Holdings (MMH), supported by an irrevocable undertaking to accept by the 64.4% shareholder Marshall of Cambridge Holdings. The MMH board has announced its intention to recommend shareholders accept this offer. This was a 42.8% premium to the closing price on 26 November and represents 17.7x FY19 (pre-pandemic) earnings and 16.3x FY22 consensus adjusted EPS. Further sector consolidation cannot be ruled out and we believe the sector remains significantly undervalued.
- Investment view: Vertu Motors now trades on a P/E of 4.7x FY22 and 10.9x FY23. This is below the mid-cycle average of 12.1x we have discussed in prior notes and below the MMH FY2 takeover multiple. At 16.3x FY23 EPS, Vertu would be valued at 101p per share. This more than supports our prior intrinsic value estimate of 85.9p, which did not include the potential upside from deploying £90m of M&A firepower.
