Vertu Motors Plc (LON:VTU) has announced a trading update, which confirms it will be in line with our 2019E forecast expectations. There continues to be good evidence that Vertu is outperforming on volume in new and used cars, albeit pressures on margins continue to persist. The outlook remains unclear ahead of Brexit, albeit the dramatic fall in our net debt forecasts aids further balance sheet strength and firepower.
Trading update: Vertu has essentially confirmed it continues to trade in line with expectations for 2019E. Overall LFL margins are slightly reduced due to pressures in used and new car margins with selling prices continuing to rise on average. That said, the balance sheet remains heavily asset backed with low debt, and the Vans Direct acquisition has integrated well.
Key performance drivers: Group revenues were +5.2% for the 5 months to 31 January and +1.4% LFL. Aftersales continues to perform well, and during 2019E saw another “significant” increase in gross profit generation with service revenues +14.2% or +7.4% LFL. Used volumes were also solid delivering +4.8% LFL, albeit some of this was at the expense of margin as it adopted a more aggressive pricing strategy. New retail sales were -6.8% on a LFL basis vs. the market -9.8%, albeit with gross profit per unit growing slightly reflecting pricing discipline and the achievement of OEM targets. Motability and new fleet sales saw volume reductions as certain volume OEMS reduced exposure to lower margin channels. In addition, the Fleet market continues to see an impact of WLTP related supply constraints previously flagged.
Forecasts: We leave our earnings forecasts unchanged following this update. While there has been a negative impact on profitability from the transfer to an agency model in the Vertu’s Ford parts business we expect the contribution from the Vans Direct acquisition to offset this. We have adjusted our 2019E net debt forecasts and now assume this will be £15.0m in 2019E from £31.4m reflecting the VAT repayment of £3.0m, a £3.0m working capital adjustment that has been released due to the change in the Ford parts business model, and also believe our underlying working capital assumptions relating to VAT reclaims were cautious. The improved cash position further strengthens the balance sheet and provides the group with additional firepower for potential acquisitions.
Investment view: We believe the long term valuation remains compelling at Vertu trading on a 2019E P/E of 8.8x falling to 7.3x in 2020E and an EV/EBITDA of 5.0x falling to 4.4x with a dividend yield of c4%. Management remain committed to driving shareholder value and we note it has acquired £1.0m of the £2.0m allotted share capital investment to date.
