Vertu Motors Plc (LON:VTU) has reported another record performance for H1 2018, with adjusted EPS +5% ahead of our expectations. We maintain our FY 2018 assumptions at this juncture but take a more conservative view in FY 2019 and FY20, which results in EPS downgrades of 10% and 8% respectively. That said, the asset backing remains compelling and we believe the Group remains well positioned to deliver disciplined growth over the medium term.
H1 results: Vertu has again delivered record results for the 6-month period ended 31 August 2017, beating our expectations at the adjusted EPS level by 4.9%. Despite the large outflow of working capital, net cash was £20.8m vs. £12.9m last year largely aided by £14.2m generated from disposals as it continues to drive optimal value from its portfolio. The H1 dividend was +10% YOY and in line with our expectations. There was £1.6m of cash deployed in the period to purchase 3.8m shares at an average price of 42.8p per share.
Key performance drivers: Management action was required to deliver the growth delivered, with new vehicles and used vehicles performing below last year at a marginal level. Decisions to close sites made a positive impact on profits, with acquisitions made in the prior year also delivering value, which has been a consistent performance enhancer since inception. Lower interest costs, also made a positive contribution. The operating expense ratio of 9.5% of revenues fell 10bps vs. last year. A key driver behind this was the impact of closed sites, which has been offset by the impact of acquisitions, higher property costs and a small increase in payroll. Cost savings have also been made in the areas of marketing, vehicle cost savings, legal/audit costs as well as other costs across the business.
Forecasts: We maintain our headline FY18 forecasts, management are not providing guidance beyond FY18E however we reduce FY19 and FY20 by 10% and 8% respectively at the adjusted EPS level. Given the current uncertainties in the new car market, and with FY18 including a strong performance in March, we believe it is logical to assume flat profitability YOY with further pressure in new volumes and margins assumed at this juncture.
Investment view: Based on our revised forecasts, we believe the valuation remains compelling with Vertu trading on a FY 2019 P/E and EV/EBITDA of 7.2x and 4.5x falling to 6.8x and 4.0x in 2020. We note we have not reviewed the forecasts of its peers post September trading. Management remain committed to driving near term shareholder value with further share buybacks on the agenda, an increasingly attractive progressive dividend policy coupled with a focus on capital allocation and FCF generation, with enhancing acquisitions likely at the appropriate time.
