Vertu Motors Plc (LON:VTU) has released a pre-close trading update this morning, confirming it continues to trade in line. The group has also announced the sale and leaseback of one of its freehold JLR sites for a cash consideration of £14m (vs a book value of £10m). The balance sheet remains extremely healthy, with freehold property most recently stated at £182m, which is above the current market cap of £176m. The strength of the balance sheet means there is significant capacity to maintain its consolidation strategy if the right opportunities arise alongside a share buyback programme. We update our forecasts to reflect the increased cash resources following the asset sale and are maintaining our trading assumptions at this juncture (albeit September trading remains key). We continue to believe Vertu remains well positioned to deliver strong growth over the medium term.
Trading update: Vertu has confirmed it continues to trade in line with expectations coming into the key trading period of September. The company has announced the disposal of one of its freehold JLR sites for a cash consideration of £14m against a book value of £10m, implying the NAV per share of over 60p could be a conservative measure. The company continues to utilize the balance sheet to deliver shareholder returns, through the ongoing share buyback programme, having bought back c.1% of the outstanding shares to date.
Key trading themes: Trading conditions in the new car market have been softening, with FX and consumer uncertainty making this a more difficult market. We note the scrappage schemes for new vehicles recently announced by key brands such as Ford (includes commercial vehicles), Vauxhall and Hyundai. Used volumes have been steady and residual values at auction look to be robust. We would expect continued margin pressure in the used car market through H2 of this year. We expect volumes and margins in aftersales to remain robust driven by the strength of the aftersales market and systems and processes the company has put in place in an effort to capture market share. As market conditions toughen all retailers are increasingly concerned about overhead growth, especially in light of the well trailed headwinds from the Apprentiship Levy, Minimum wage and property rates increases. The Group noted in its AGM statement that it is focused on pricing disciplines and cost control which had helped drive growth in like-for-like profits.
Forecasts: We update our forecasts to reflect the additional cash resources following the asset sale. The balance sheet is extremely robust following this disposal with significant cash resources available. We are maintaining our underlying trading assumptions, which remain at the cautious end of the consensus range and expect an adj. PBT of £20.2m for the half year (H1 2017:£19.5m). Trading conditions in September will remain critical in how the FY outturn plays out for FY 2018, and is coming back off a Q2 -16% reduction in private new car registrations according to SMMT data.
Investment view: We believe the valuation is compelling with Vertu Motors Plc trading at a c20% discount to its UK peers on an EV/EBITDA and EV/EBIT basis and c10% on a P/E basis. The shares 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, hence added into valuation EV, rather than creditors which is the norm for its peer group) with forecast NAV per share in excess of 60p.
