Vertu Motors Plc (LON:VTU) has reported another record performance for 2017A, with adjusted EPS +7% ahead of our forecast expectations. We are maintaining our cautious FY assumptions from 2018E and beyond. The Group has very strong foundations in place given its growing aftersales and used car operations accounting for over 70% of gross profit, coupled with having the strongest and most flexible balance sheet in the sector. We therefore believe Vertu remains well positioned to deliver strong growth over the medium term.
Final results: Vertu has delivered record results for the 12-month period ended 28 February 2017, beating our expectations at the adjusted EPS level by 7%. Revenues were 2% ahead of our expectations and +16.5% YOY. Gross profits were +19.1% YOY and 3% ahead of our forecast. This was driven by the strengthening of gross margin, which advanced 20bps. Adjusted EBIT was also ahead of our forecast with margins static YOY at 1.2%. Adjusted PBT at £31.5m was +15% YOY and bang in line with our forecast. Adjusted EPS was +1.2% and 7% ahead of forecast due to a lower tax rate. The dividend was in line with our forecast and +8% YOY, with dividend cover running at 4.6x. Cash conversion was once again excellent running at 181%, resulting in a stronger than expected net cash position (£21.0m vs £1.7m forecast).
Key performance drivers: The performance in used cars was particularly positive and generated nearly 70% of the core gross profit growth, with aftersales showing solid progress. It was also reassuring to see the acquisitions made in 2016 and 2017 come through and make a positive contribution in these results. We believe this validates the consistent strategy management have had in place since inception over a decade ago. New cars made a modest negative contribution to gross profit growth, albeit this does reflect negative private registration data across most of the period based on data from the SMMT.
Forecasts: We are maintaining our cautious forecast assumptions, and remain at the lower end of the consensus range. We have lowered our tax rate assumptions from 21% to 20%, which drives a 5% increase in our EPS forecast aided also by a slightly lower fully diluted share count than previously assumed.
Investment view: Compiling the various valuation techniques used in the note, we average 105p per Vertu Motors Plc share: this is based on values ranging from 160p for our DCF analysis to 60p reflecting typical mid‑cycle P/E multiples based on depressed 2017E EPS multiples (assuming no further acquisitions). At current levels, we see significant long-term value, as Vertu continues to benefit from being an even larger scale operator.
