Vertu Motors PLC (LON: VTU) – Tapping Market Opportunities through Consolidation Amid the Demand Downturn Scenario

Vertu Motors PLC is a FTSE AIM All-Share listed Company, which is engaged in the retailing of new cars, commercial vehicles, and motorcycles. It also deals in used vehicles, with associated aftersales services. The Company has a network of around 23 manufacturer partners and approximately 133 outlets (including sales and aftersales) across the United Kingdom. The Group was launched in 2006 and trades under the name of Hereford Audi, Vertu Mercedes-Benz, Macklin Motors, Farnell Land Rover, Farnell Jaguar, and Bristol Street Motors. On 16^th January 2020, the Company acquired the assets and trade of four Volkswagen dealerships from Goodman Retail Limited in Yorkshire. The Company has been admitted to trading over the London Stock Exchange since 27^th March 2007.

On 20^th August 2020, the Company will hold the annual general meeting.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Segment Analysis

The Company is organized into four business segments, namely Aftersales, Used Cars, New car retail & Motability, and New fleet & commercial. The revenue is further divided in terms of recognition – ‘Recognised over time’ and ‘Recognised at a point in time’.


 (Source: Presentation, Company Website)

Measuring Performance Against Strategic Objectives by Using Operational KPIs
 

1. Customer services measured through the email survey stood at 97 per cent satisfaction level.

2.  Online visitors grew to 15.7 million in FY20, compared to 14.0 million in FY19.
 

 (Source: Presentation, Company Website)

Synopsis of Recent Developments

3^rd June 2020: The Company has suspended the final dividend for FY20, considering the ongoing crisis. It is noteworthy that the Company has already returned over GBP 34.8 million to shareholders through dividends over the nine-year period since 2011.

7^th May 2020: Due to government restrictions, the Company had to shut all its retail outlets on 23rd March 2020 temporarily. However, 98 of the total 133 dealership aftersales operations remained open during the lockdown.

28^th February 2020: The Company acquired the assets of Peugeot dealership.


(Source: Presentation, Company Website)

Top Shareholders Statistics

 

Operations Highlights for the financial Year 2020

In the financial year 2020, VTU recorded an adjusted PBT (Profit before tax) of GBP 23.5 million and stood in line with expectations versus GBP 23.7 million in FY2019. The Group added 12 new sales outlets, including 3 franchise partners to the portfolio. The Company provides tight control assurance on strategies execution and operations based on industry-leading in-house developed systems and strong management. VTU increased the efficiency in the processing of transaction across the business through the deployment of new technologies. The Group has taken scrupulous planning to reopen dealerships in a safe way following the social distancing norms. Through the support from the manufacturing partners and banks, the Company has a robust balance sheet with a lower debt level.

Financial Highlights – Increased Revenue in the Financial Year 2020 (29^th February 2020)


(Source: Annual Report, Company Website)
 
For the financial year ending 29^th February 2020, driven by an increase in revenue from Fleet & Commercial, Used and Aftersales business for the period, the revenue increased to GBP 3,064,530 thousand as against GBP 2,982,200 thousand in FY2019. The gross profit stood at GBP 334,057 thousand in FY2020 versus GBP 322,105 thousand in FY2019. The underlying operating profit surged to GBP 29,062 thousand in FY2020 from an underlying operating profit of GBP 27,391 thousand in FY2019. The underlying PBT (profit before tax) stood at GBP 23,501 thousand in FY2020 versus GBP 23,710 thousand in FY2019. The underlying Profit for the period attributable to shareholders stood at GBP 18,978 thousand in the financial year 2020 versus GBP 19,240 thousand in FY2019. The reported basic earnings per share stood at 0.81 pence in FY2020 versus 5.45 pence in FY2019.

Financial Ratios – Increased Stores and Strong Profitability Margins versus FY2019 Data

 

In the financial year 2020, the number of stores increased to 133 versus 123 in the FY2019. The reported Gross Margin and EBITDA margin stood at 10.9 per cent and 1.9 per cent, respectively, for the financial year 2020. Reported profitability metrics were higher against the last year data, reflecting better control over operating expenses and increased revenue for the period. On the liquidity front, Vertu Motors Plc’s current ratio was lower than the industry median of 1.15, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Vertu Motors Plc’s was 0.63x, which was higher as compared to the industry median of 0.58x, reflecting that the company is more leveraged as compared to its peers.

Share Price Performance Analysis


Daily Chart as on 23^rd June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 23, 2020, at the time of writing (before the market close, at 11:29 AM GMT+1), Vertu Motors Plc shares were trading at GBX 26.80, up by 2.87 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 43.33/GBX 16.57.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Vertu Motors Plc with its peers, Price/Earnings multiple has been used. The peers are Pendragon Plc (NTM Price/Earnings was 7.97), Marshall Motor Holdings Plc (NTM Price/Earnings was 5.91), Cambria Automobiles Plc (NTM Price/Earnings was 4.99) and SCS Group Plc (NTM Price/Earnings was 4.94). The Average of Price/Earnings (NTM) of the company’s peers was 5.95x (approx.)

Valuation Metrics

                                                
(Source: London Stock Exchange)
 
As on 29^th May 2020, EV to EBITDA and Price to Cash Flow multiples of the Vertu Motors Plc stood at around 3x and 2.20x, respectively, which were lower as compared to the industry metrics. It reflects that the shares are undervalued against peers.

Vertu Motors Plc Vs FTSE AIM 100 Index (3 months)


(Source: Refinitiv, Thomson Reuters)

In the last three months, Vertu Motors Plc share price has delivered 55.27 per cent return as compared to 50.56 per cent return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last three months.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

Vertu Motors Plc has an indicative dividend yield of 2.30 per cent, which is higher than the industry dividend yield of 1.61 per cent. However, this needs to be considered in view of the recent correction in the stock price. Also, with company’s decision of not recommending the final dividend, the sustainability of yield is subject to various factors, and we expect Vertu Motors to re-consider payments post assessing the overall financial situation in the post-COVID era.

Industry Outlook Dynamics

As per the Society of Motor Manufacturers and Traders (SMMT), the UK Car market sales plunged by 8.3 per cent in Q1 FY20 since the showrooms were closed during the lockdown period. In terms of the market size, the current UK automotive industry is worth over GBP 82 billion. As per Statista, the aggregate revenue of the Global automotive industry is projected to reach USD 8,931 billion by 2030 from USD 5,315 billion in 2017.

Growth Prospects and Risk Assessment

The Company has made decent progress in the financial year 2020, and it is expected to emerge strongly from the ongoing crisis arisen from the COVID-19 disruption due to its financial strength, trusted relationships with manufacturers, and omnichannel capabilities. Moreover, the deployment of new technologies shall yield increasing efficiency and omni-channel retailing. It has a strong balance sheet with low debt position to ensure substantial liquidity. The Group added 12 sales outlets and 3 new franchise partners to its portfolio to strengthen the market position. Overall, the Company is well-positioned to capture the market opportunities arising through the scope of consolidation. The Company has been focussed on its services and customer support, which has resulted in a higher level of customer satisfaction. The Group’s experienced management team has made some necessary strategic changes which have resulted in business growth in short duration. The company’s newly launched operations into new markets and products are exciting and have enabled to diversify the revenue streams without compromising the focus on high-value customers and prospects. VTU also needs to raise the appropriate balance of debt and equity to implement its growth plans successfully.

However, the UK automobile retail sector was facing a series of challenges even prior to the spread of the coronavirus, including new vehicle supply issue, weakening of Sterling, pressure of WLTP (Worldwide Harmonised Light Vehicle Test Procedure) regulations, continuous cost pressure, and political uncertainties due to Brexit. Moreover, the wake of the pandemic might put further pressure on Co2 emission legislations, while it is impacting the retail vehicle demand. To curtail the financial impact, the Group maintained its sales capacity intact, while aftersales services remained open during the lockdown conditions.

 
(Source: Annual Report, Company Website)
 
The company has recently launched operations in the new markets, which will increase regulatory risks. The company’s operations are impacted negatively due to the foreign exchange rate fluctuations. To meet the new regulations, the Group needs to implement new processes, failing to do so would increase the compliance risk.

Business Outlook Scenario

In the financial year 2020, VTU delivered another decent aftersales performance with like for like service revenues increased by 4.6 per cent and gross profit growth of 5.9 per cent. Despite the pricing volatility in H1 FY2020, the Group delivered stable margins and volume from Used vehicle business. The Company exhibited strong control over its costs and reported growth in adjusted operating profit.Over the last three years, the Group has made a significant investment in the Company’s dealership portfolio, reflecting decent execution in retaining clients. The Company has a decent liquidity position which is supported by manufacturing partners and banks. Based on the available growth opportunities, VTU is well-positioned to take the role of the market leader.
 
Over the course of 3 years (FY17 – FY20), the company’s revenue surged from  GBP 2,822.6 million in FY17 to GBP 3,064.50 million in FY2020. Compounded annual growth rate (CAGR) stood at 2.78 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current market price of GBX 26.80 (as on 23^rd June 2020, before the market close at 11:29 AM GMT+1), with lower-double digit upside potential based on 5.95x Price/Earnings (approx.) on FY21E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.