We note the announcement released this morning by Marshall Motor Holdings (LON:MMH) confirming a robust H1 performance with full year expectations currently at the upper end of consensus. The strong H1 performance is encouraging in the context of a challenging market and a record prior year comparative. We are nudging up our forecasts on the back of this statement, which equates to an EPS upgrades of 3-5% during the forecast period. The shares are trading at a clear P/E and EV/EBITDA discount to the sector, and has a robust balance sheet with >£100m freehold and long leasehold assets underpinning the valuation.
Trading update: The group has delivered a strong H1 performance in a challenging market environment which we expect to be marginally ahead of last year (excluding the impact of the leasing business) implying an adjusted PBT approaching £16.5m. The disposal of the leasing business in November 2017 included a £1.5m retention relating to historic pension liabilities. These have been settled at £0.9m resulting in a one-off profit relating to the disposal to be recognised in the 2018E H1 figures. The company has also confirmed that Mark Raban will be stepping down as CFO and the process to find his successor has commenced. While this is a surprise to us, we believe he leaves the Group with the balance sheet in excellent shape following some strong strategic moves during his 4-year tenure.
Key performance drivers: In the retail segment, like-for-like new car sales were in line with the overall market – which saw a 5.7% decline in retail customer registrations. Excluding the impact of the groups decision to exit the low margin fleet business, LFL new car sales were ahead of the market. In the used segment, profitability has increased YOY on relatively flat LFL volumes, which has been delivered in a declining market, through robust inventory management and cost reductions during the period. The aftersales segment saw LFL growth in revenues in H1 vs last year. Margin pressure in this part of the business, driven by increased mix of lower margin parts revenues has offset this revenue growth resulting in a relatively flat performance YOY.
Outlook: We upgrade our forecasts to reflect the strong H1 performance. We now expect adj. PBT for the full year of £23.5m in 2018E, (£22.5m previously), growing to £24.1m in 2019E (£23.1m previously) and £24.7m in 2020E (£23.6m previously). This equates to a 3% EPS upgrade in 2018E rising to 5% in 2020E. We also update our working capital assumptions to reflect tighter inventory management We remain cautious with continued weakness in consumer confidence in recent months against a backdrop of increasing political and economic uncertainty. We also see potential for supply issues to come through in H2 as the new WLTP testing procedures begin to come into effect, so maintain an overall cautious view.
Investment view: Marshall Motor Holdings PLC shares are trading at a clear P/E and EV/EBITDA discount to the sector UK dealer average in excess of 30% on both measures. The group has >£100m of freehold and long leasehold assets on the balance sheet providing strong asset backing. This is supported by our valuation methodology which implies a value of 236p per share, which would imply a P/E of just 10x 2019E EPS and therefore undemanding in our view, with a current progressive dividend yield in excess of 4%.