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Vertu Motors Plc

Vertu Motors PLC Building out a Mercedes cluster – Zeus Capital

Vertu Motors PLC (LON:VTU) has announced its first acquisition in over two years, as it has acquired Hughes Group, which is a well-established Group backed with a strong operational management team. This creates a significant cluster in the M4/M40 corridor for Mercedes as well as having its first Mercedes Commercial Van franchise. We are upgrading our 2020 and 2021 EPS forecasts by 6-8% on the back of this transaction

Acquisition: Vertu has acquired Hughes Group Limited, a well-established Group, and has represented Mercedes for over 40 years. Included in its portfolio is Mercedes outlets in Beaconsfield and Aylesbury, which is adjacent to Vertu’s existing Mercedes operations in Reading, Ascot and Slough. In addition, there is also a Mercedes Commercial Van franchise through its operation in Aylesbury. Hughes also operates outlets for Skoda (Aylesbury), Jeep (Beaconsfield) and Peugeot (High Wycombe) coupled with a vehicle preparation centre in Wendover. The operational management team of the successful Hughes business will be maintained in the Group.

Financials: Vertu will pay an estimated cash consideration of £21.8m, with a deferred consideration of £1.5m within this amount funded from cash resources. Net assets were £12.0m (freehold £6.2m), which should further enhance the significant asset backing in the Group. To December 2017, Hughes delivered revenues of £150m, EBITDA of £2.8m and PBT of £2.1m. We are not assuming any near term synergies, but we would envisage this business to deliver between £3.5m and £4.0m of EBITDA on a mature normalised basis, and believe there could be an opportunity to reduce working capital by £2.5m. On this basis, and reducing this from the initial EV, we believe Vertu has paid c6x EBITDA for this business, and view this as a good price given the quality of the assets, operations and potential synergies.

Forecasts: Given the timing of this transaction does not include trading for March, we expect this to have a modestly dilutive impact on 2019E EPS. However, for the first full year of ownership reflected in our 2020E forecasts, we anticipate this to enhance EPS by 6%, and anticipate a 8% uplift in 2021E taking a conservative approach to potential synergy gains.

Zeus Capital Investment view: We believe the long term valuation remains compelling at Vertu trading on a 2019E P/E of 10.2x falling to 8.0x in 2020E and an EV/EBITDA of 6.0x falling to 4.5x. The FCF yield post 2019E also looks highly attractive post 2019E at 8-9% with progressive dividend yielding in excess of 3% to boot. Management remain committed to driving shareholder value and we note it has acquired back 4.5% of the issued share capital with authorisation renewed to go up to 10%. The AGM is the next scheduled news on 25 July.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.