Vertu Motors (LON:VTU) has delivered a robust set of H1 results, which are in line with our forecasts but down -13.4% at the adjusted PBT level, albeit with adjusted EPS -8.0% helped by the share buyback programme. We are maintaining our headline forecasts following our sector note last week. While the outlook is no doubt uncertain with supply pressures likely to persist in the near term, we believe the Group is well positioned to cope with such pressures given its strong balance sheet, rising FCF generation and strong track record of delivering disciplined growth.
H1 results: Vertu has delivered a robust set of results for the 6-month period ended 31 August 2018 and are in line with our expectations delivering £18.1m at the adjusted PBT level (ZC £18.0m). This compared to £20.9m delivered last year and was therefore a 13.4% YOY decline. However, the YOY reduction on adjusted EPS was 8.0% due to the impact of the share buyback programme, which helps to offset rising interest costs. The interim dividend was held flat YOY, albeit the company may resume the share buyback programme having got approval to repurchase up to 10% of its issued share capital.
Key performance drivers: All of its key segments excluding fleet & commercial continued to exhibit organic growth. Cost pressures continue to weigh on Group performance, while the acceleration of interest costs due to slowing fleet activity also had an adverse impact on profitability. Due to timing, the Hughes acquisition had a small adverse impact on Group performance, albeit this was more than offset by proactive decisions to close underperforming dealerships as part of its capital allocation strategy.
Forecasts: Following our sector note last week, we are maintaining our headline forecast assumptions. The only changes we are making is to flatline the dividend through the forecast period given the uncertain trading conditions. However, we believe the company may resume the share buyback programme. We have also tweaked our net debt assumptions, as we assume a greater working capital outflow during H2 following stability in H1. That said, on our revised numbers net debt/EBITDA remains below 1x, and we anticipate future levels of FCF to be moving toward £20m per annum, which implies a highly attractive FCF yield of 12%.
Investment view: Based on our recently revised forecasts, Vertu trades on a 2019E P/E of 9.1x and EV/EBITDA of 5.4x, which falls to 7.6x and 4.7x in 2020E. Compiling the various valuation techniques used in this note, we calculate an average valuation 74.2p per share. While near term trading conditions remain challenging, we see significant long-term value from here, and believe Vertu is well positioned to cope with such headwinds.
