Vertu Motors Plc (LON:VTU) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview
Q1: Now, Vertu Motors, they’ve just released a pre-close trading update, can you talk us through the highlights?
A1: I think the main issue on this statement was that they’d sold one of their freehold JLR sites for a cash consideration of £14 million, they’ve put a sale and leaseback on it and that compares to a book value of £10 million. We think this is quite interesting really because they’ve got freehold property assets worth £182 million against a market cap of just over £175 million and we think this shows how conservative that £182 million is on the balance sheet. We wouldn’t expect deals of this nature all the time but I do think it highlights the inherent value in their asset base at the moment.
In terms of trading, trading pattern is pretty much as they confirmed in their last statement so new car market remains tough albeit we do know a number of scrappage schemes that have been announced recently by brands such as Ford, Vauxhall, Hyundai and we do expect more to be announced in due course. We are entering a very key trading period in September, at the moment, it’s too early to say how that trading has gone but there appears to be a bit more stimulus in the market at the moment. Used cars, I think, remains as they say so volumes are ok, a little bit of margin pressure that they’ve already pointed out and I think we’ll continue to see them do good initiatives on cost as they’ve got a good track record there, and the after-sales business continues to be robust as well.
Q2: What can you tell me about your forecast? What assumptions were made?
A2: Our headline trading forecast remain unchanged on the back of this and they will do until we can absorb how September has progressed and we should get a feel for that when they announce their H1 results in mid-October. We have reflected the additional cash into our forecast so we’d expect Vertu Motors to have net cash in excess of £20 million in 2018 which then puts them in a very strong financial position as well. So, our forecast assumptions on an underlying basis remain unchanged for now.
Q3: What are your thoughts on long-term investment and Vertu Motor’s valuation itself?
A3: I think the shares, and indeed the sector, looks very undervalued at the moment, there are some near-term trading concerns but Vertu, our numbers, are trading on a PE to February ’18 of 7 times and EV/EBITDA of just over 4 times, backed with a dividend yield of over 3% as well. As we’ve said before, the balance sheet is very conservative, very asset rich as well which as we’ve seen today, the book value appears to be conservative so we think the stock does look good value relative to its peers. It’s on a 20% discount on EV/EBITDA basis and about 10% discount on a PE basis and I think, given what they’ve delivered to date, the balance sheet and how it’s set up etc., I think that looks very attractive for long-term investors, in our view.