Vertu Motors PLC (LON:VTU) has delivered a robust AGM trading update despite clear signs that market conditions have softened in new car volumes and used car margins. The balance sheet remains extremely healthy, and there is significant capacity to maintain its consolidation strategy if the right opportunities arise alongside a share buyback progarmme. We are maintaining our forecast assumptions at this juncture (albeit September trading remains key), and continue to believe Vertu remains well positioned to deliver strong growth over the medium term.
AGM trading update: Vertu has delivered a robust trading AGM update for the four months to 30 June 2017, despite market conditions clearly softening from a record Q1 2017. Private new car registrations were +4.4% in March, with new car registrations currently running at -6.1% during the trading period. Pricing disciplines and cost control (this was key across all areas of the business) has helped to offset softer trading conditions caused by the pull forward of orders into Q1 due to Vehicle Excise Duty, the impact of sterling depreciation on new car pricing and general UK consumer uncertainty. During the period to 30 June 2017, the Group is expected to deliver higher profits YOY vs. what was a strong comparator last year.
Key trading themes: Aftersales LFL revenues and profitability have continued to increase during the period, and this is testament to its well-executed and long standing customer retention strategies. New retail sales volumes have softened as seen across the wider market, while used vehicle margins have also been softer “reflecting a downturn in consumer confidence from April onwards.” This is a consistent message we have been seeing across the retail sector at present (DFS profit warning a recent example), with the softness in used car margin more pointed towards premium franchises, which is consistent with the trading update from Marshall Motor Holdings on 4 July. Acquisition opportunities continue to be assessed, albeit within the confines of its consistent valuation criteria to ensure future returns. The balance sheet remains extremely strong despite the significant investment undertaken across the franchise in recent years, with the Group also actively engaged in the disposal of two freehold assets that could yield further cash proceeds in excess of £7.0m. The Group is also seeking authority to undertake a share buyback progarmme initially up to £3.0m, and we believe it has significant capacity to do so alongside its consolidation strategy.
Forecasts: We are maintaining our forecast assumptions for Vertu Motors PLC, which remain at the cautious end of the consensus range. 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 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 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.
