Vertu Motors “great deal of growth potential and hidden value” says Zeus Capital

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Alongside its primary franchised dealerships businesses (Vertu Motors, Bristol Street Motors and Macklin Motors), Vertu Motors plc (LON:VTU) operates a number of ancillary businesses. These include car parts and accessories, cosmetic repairs, van retail broking to commercial customers, online lease advertising, and taxi supply. We think there is a great deal of growth potential and hidden value in these businesses – in this note we provide an overview of each business, before discussing our refreshed valuation estimates for Vertu.

Vertu Ventures: Vertu operates a number of highly-scalable technology-enabled businesses that operate separately from the main franchised motor retail network, adding revenue and returns to the core business. The Vertu Ventures division is set up to capitalise on new opportunities and boost overall profit growth organically and via acquisition. In the six months to 31 August 2021, the ancillary businesses generated PBT of approximately £2.0m. We expect these businesses to generate annual PBT of £5.0m in the near term.

Source of hidden value: We believe the growth prospects and scalable models of these businesses warrants a higher valuation multiple than traditional motor retail (8.0-14.0x P/E). Our analysis of a range of parts businesses, online platforms, and vehicle leasing companies suggests an 18.0x P/E multiple is appropriate. Using this multiple and £5m of PBT less 25% tax, we estimate incremental value of £67.5m (18.6p per share), which is supported by a DCF estimate of 20.0p per share (10.2% discount rate, 3% terminal growth).

Investment view: We have refreshed our valuation estimates for Vertu, the average of which has increased to 96.6p, a 34% upside to the current share price. These estimates do not include the impact of any M&A (Vertu has c. £80m of acquisition firepower post the latest acquisition) or the hidden value from the ancillary businesses that we see. Adding our 18.6p estimate to our 96.6p average gives a total value estimate of 115.2p per share. Either via M&A or through the unrecognised potential of these ancillary businesses, we see opportunity for further generation of long-term shareholder value.