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, they announced their AGM statement this morning, what were they key points we should be looking at?
A1: They released their detailed AGM statement outlining the performance for the 4 months to the 30th June 2018.
Essentially, the company is saying that they’re trading in line with expectations, clearly demonstrating continued market share gains across most areas of the market whilst the business kept a firm grip on costs as well. Near-term outlook does remain uncertain with supply pressures building as a result of FX uncertainty and WLTP regulation which we’ve flagged before but very committed to focussing on capital allocation and driving further shareholder value.
Q2: What trading themes have you noticed?
A2: I think the theme for us was the performance in used cars, they delivered a 13.1% like-for-like increase in like-for-like revenue in this business and that was versus a static market, but they’ll also deliver a like-for-like increase in gross profits on the back of that, albeit that there was some margin pressure due to the premium mix coming through.
After sales, again, saw very decent growth of 6.5% like-for-like coming through in service revenues which I think is a healthy indication that it continues to take market share but again, there is cost pressure in that business as well, but they should deliver a like-for-like growth in gross profits in that area of the market.
In new cars, despite quite a tough market, they outperformed as well so they delivered volume growth of about 2% versus a market fall of 4% so again, good outperformance and commercial van sales was also up strongly about 7% against the market down 3%.
Q3: Has it changed your forecast in any way?
A3: So, we’re maintaining our earnings forecast on the back of this update, however we have tweaked up our net debt just to reflect a freehold they acquired in Newcastle to the tune of £7.4 million. The balance sheet remains a very asset strong and net debt to EBITDA well below 1 times as well in what will be a heavy year of capex which has already been flagged.
Q4: As an investment, what is your view on the Vertu Motors stock?
A4: I think the sector valuation remains very undemanding, if you look at Vertu trading on a February ’19 PE of 10 times, EV/EBITDA of 6.2 times falling to 8 times and 5 times respectively a year later. We think the normalised free cash flow yield is very attractive at 8-9% and is also a very progressive dividend yield on offer as well in excess of 3% at the moment.
The company are committed to driving shareholder value and its acquired more than 5% of the issued share capital to date but they do have the authorisation to go towards 10%. I think it’s a very well-managed business and an attractive long-term valuation.
