Marshall Motor Holdings Plc (LON:MMH) CEO Daksh Gupta and CFO Mark Raban join DirectorsTalk to discuss the sale of Marshall Leasing. Daksh explains why they are selling Marshall Leasing and the impact to the group, plans for the proceeds and growth opportunities for the company. Mark explains the terms of the sale and how this effects the balance sheet.
We also spoke with Mike Allen Head of Research at Zeus Capital for his thoughts on the news. Mike talks us through the disposal, changes to the forecast and his thoughts on the company stock value.
Mikes summary:
Marshall Motors have announced the disposal of their leasing business, subject to FCA approval, to Northridge Finance for a gross cash consideration of £42.5m (11.5x 2016A PAT). We see this as a positive for MMH, allowing the group to strengthen the balance sheet, focus the business model and reduce exposure to used car residual values at a time of uncertainty. The Disposal is expected to be dilutive to underlying earnings per share in the year ending 31 December 2017 although there will be a significant gain on disposal. We leave our forecasts unchanged for the moment and will update post FCA approval and formal completion.
Disposal: Following a strategic review of Marshall’s leasing business (MLL) MMH has agreed to sell MLL to Bank of Ireland, subject only to approval of the transaction by the FCA. The gross cash consideration of £42.5m (11.5x 2016 earnings) will be due on completion. On completion, MMH will enter into a transitional services arrangement to enable the smooth integration of MLL into Bank of Ireland and an agreement for the supply of new vehicles by MMH to MLL. Continued consolidation in the leasing and fleet management sector is making scale an increasingly important factor, in a very capital intensive business model. The disposal of the leasing business allows MMH to reduce leverage allowing greater flexibility in the balance sheet and allows the group to focus its business model and financial resources on delivering further growth in the core retail business. While the leasing business is asset backed, the significant debt associated with the business increased balance sheet risk, in our view and we believe the business will be in a significantly improved financial position post completion of the deal.
Financial impact: The net cash proceeds of the Disposal will initially be used to reduce existing levels of indebtedness and settle a c.£1.0m pension liability. The group has incurred c.£1.7m of exceptional costs as a result of the transaction and will realise a significant gain on disposal during the period. The Group’s reported net debt at 30 June 2017 was £101.1m. As a result of the Disposal, the Group’s pro forma 30 June 2017 balance sheet would have been un-geared with net cash of approximately £4.6m. We have previously highlighted the level of gearing in the business relative to sector peers has been high and see this disposal and the deleveraging as a positive for the business, especially given the growing uncertainty in the sector. In the year ended 31 December 2016, MLL generated total revenue of £39.3m, an underlying profit before tax of £4.9m and profit after tax of £3.7m.
Investment view: If the Disposal had been completed on 30 June 2017, MMH would have had pro forma net assets at that date of approximately £196.7m (equivalent to 254p per share) and pro forma net cash of approximately £4.6m. The shares are trading at a discount to NAV and a clear P/E and EV/EBITDA discount to the sector, given the improved strength of the balance sheet and more focused business model there is potential for this discount vs the peer group to close.
