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: Vertu Motors have just provided a trading update, can you give us an overview of what was said?
A1: Essentially, they’ve confirmed that they’ve continued to trade in line with expectations for the year to February 2019.
Overall, like-for-like margins are slightly reduced due to pressures in used and new cars but selling prices continue to rise and the company continue to outperform in volumes terms as well.
It’s also important to note that the balance sheet remains heavily asset-backed with very low debt and the recent Vans Direct acquisition has also integrated well.
Q2: What key themes did you note in the update?
A2: I think in terms of key themes, aftersales revenue grew by 7% on a like-for-like basis which I think is good news and we saw a similar drop-through in terms of gross profit like-for-like growth, I think the margins there were stable and that accounts for over 14% of group gross profit.
I think in used cars, the sales volume growth of around 5% is also good news as well albeit there was a little bit of margin pressure there.
In new cars, the new car volume declined by about 7% but the market was down 10% in that period as well, again I think they’ve quite worked in terms of gross profit per unit and we saw a slight increase there.
Fleet and commercial, we did see declines there but I think that was a lot to do with the market positioning of the manufacturers’ partners who were pulling back from lower margin car sales.
The company did flag that there was a reorganisation with the transfer of trade operations to some of the new part hubs, we saw the impact of that during the period as well. We actually expect there to be a small profit decline as they move more towards the agency model albeit that that’s offset by the integration of the Vans Direct acquisition.
Q3: So, has this impacted your forecast in anyway?
A3: In terms of our forecasts, we are reading our headline numbers unchanged following this update. So, as I referred to, there is a small negative impact from the transfer to the agency model in the Ford parts business but that is offset by the contributions from the Vans Direct acquisition.
A big change in our forecasts is our net debt, we do expect the net debt position to be materially higher than what we were forecasting. So, we’ve recognised a VAT repayment of about £3 million which has now been confirmed, there’s a positive working capital adjustment due to the changes in the parts business and also, we believe that our underlying working capital assumptions are very conservative as well.
The upshot is we expect net debt of around £15 million to February 2019 which leaves the company with a very strong balance sheet and that could provide additional fire power for potential acquisitions further down the line.
Q4: Finally, what’s your view on the Vertu Motors valuation?
A4: We think the long term valuation looks very compelling to us so 2019 is trading on a PE of 8.8 times falling to 7.3 times in 2020 and EV/EBITDA of about 5 times, falling to 4 times in 2020 and we’ve got a dividend yield of about 4%.
Management do remain very committed to driving shareholder value and it continues with its share buyback programme as well and, as I referred to before, it has a very strong balance sheet to weather any pressures we see in the industry at the moment.
So, overall, we believe the company is very well positioned.
