We anticipate a robust set of results from Vertu Motors Plc (LON:VTU) on 10th May, and expect to see continued progress in its core businesses of used cars and aftersales. We believe our forecasts for the coming year (Feb 2018) are very conservative, particularly following a record Q1 period of new car registrations seen in the wider industry. However, we would anticipate this backdrop to get tougher from here. We believe the near-term valuation remains compelling and very attractive, with the current market capitalization largely asset backed with a progressive 3% dividend yield on offer at present and a normalized FCF yield (from 2020) in excess of 10%.
Final Results: We anticipate a robust set of FY results from Vertu on 10th May and are forecasting revenues +14% YOY, a 10bp YOY upward movement in gross margins to 11.0% with operating margins static YOY at 1.2%. This assumes broadly flat underlying operating expenses as a % of revenues reflecting some anticipated cost pressures. We have assumed a £0.3m increase in interest YOY to reflect increased activity levels, which implies an adjusted PBT of £31.5m vs. £27.4m last year. If delivered, this implies adjusted EPS of 6.1p, which is -6% YOY to reflect the full impact of the equity placing last year (409.5m shares vs. 349.5m last year). We are forecasting a dividend of 1.4p vs. 1.3p paid last year, which is +7% YOY. We are forecasting modest net cash of £1.7m vs. £23.1m last year albeit this includes £28.0m of capex and £47.9m of acquisition costs.
Key themes: The last trading update on 1 March was robust as it confirmed it was trading in line with expectations as it experienced growth in volumes, revenues and profits across the board. Acquisitions undertaken in the prior and previous years were also said to be going to plan, with good cost control measures in place. Since this announcement, data from the SMMT confirmed a strong March (see our note from 5 April), with the used car market also robust from a volume demand and residual value perspective per Glasses Guide and CAP HPI. We would expect the medium-term dynamics to remain solid in aftersales given continued strong activity levels in the new car market. We also note the near-term bounce in sterling in recent weeks, which might also encourage OEMs to stimulate the market into Q2 with a mooted diesel scrappage scheme also potentially on the horizon.
Forecasts: Our 2018 forecasts are c7% below consensus at the adjusted EPS level, which could prove too conservative following a record Q1 period (calendar) of new car registrations. That said, we believe the outlook is likely to get more difficult from here as per our industry thesis set in November last year.
Investment view: We believe the valuation is compelling with Vertu Motors Plc trading at a c15% discount to its UK peers on an EV/EBITDA and EV/EBIT basis and c10% on a P/E basis. The shares also continue to underperform its peer group. We believe this is at odds with its strong, cash rich and conservative balance sheet (used car stocking loans are shown as debt rather than creditors) with forecast net assets per share in excess of 60p per share. We believe the shares have been oversold and remain well positioned.
