Vertu Motors PLC

Established in 2006, Vertu Motors PLC (LON: VTU) is a FTSE AIM All-Share listed motor retailer in the United Kingdom. It operates a chain of the franchised dealership for offering sale, body shop facilities, servicing, spare parts for new, used, and commercial vehicles. The majority of its dealership are operated as Bristol Street Motors, while the Company also operates Premium franchise dealerships, including Audi, Mercedes-Benz, Volkswagen, and Jaguar. It is also the UK’s largest operator of the Honda dealership. In the year 2010, VTU also expanded its network to Scotland under the Macklin Motors brand.

 (Source: Company Presentation)

Growth Prospects

• Electrification and Alternative Powertrains: According to the Society of Motor Manufacturers and Traders (SMMT), 2020 was the best year for electric cars, while the hybrid vehicle market share surged 10.7%. VTU’s sales of electric and alternatively fuelled vehicles reached 2,356 vehicles in FY21, which doubled over the prior year, representing 9.3% of the sales of new retail vehicles.
• Improved Financial Position: During FY21, VTU demonstrated a resilient revenue generation despite Covid-19 induced lockdown, better gross margin than FY20, reduction in like-for-like operating expenses, improved profitability, enhanced net tangible assets per share, record free cash flow generation and increased liquidity, which underpins the potential to pursue the upcoming growth opportunities lying with the electrification of vehicles.
• Enhanced Capabilities: VTU has bolstered online offering, local presence, customer proposition, national footprint, and strong brand image during FY21 despite the continued uncertainty around COVID-19. It has a proven record of the strong balance sheet, continued expansion, and reliable execution, which shall bring greater scale and efficiency to the business.

• Swift Execution of Strategies: VTU has sector-leading and scalable in-house systems and technology, supported by stable management, which provides assurance of tight control of operations. VTU’s Click2Drive platform has the potential to generate substantial growth in online retailing. Moreover, the use of robotic process automation can also enhance the efficiency of transaction processing. 

• Improved Macroeconomic Picture: The renewed strength of the Sterling against the Euro following the fading of Brexit uncertainties had made the UK a more profitable market for manufacturers to increase supply levels and export cars. VTU has taken a decent share in this buoyant market with improved demand conditions.

Risk Assessment

• Regulatory Pressure for Carbon Emissions: The move to electric vehicles has put cash levels and future returns of automobile manufacturer under pressure since the cost of production is likely to increase.
• Pandemic Impact: The Covid-19 induced restrictions led to showroom closures and impacted the sales in FY21. With lockdown easing, the situation is likely to improve; however, the potential another wave of the pandemic can lead to a reduction in activity and profitability again. The Company might need to adopt a defensive strategy to conserve liquidity, which can hamper growth prospects.
• Semi-conductor Shortage: The demand spike in consumer electronics amid pandemic jolted the fragile semi-conductor supply chain.
• The supply situation can be impacted in the short-term with the global shortage of semi-conductor, it is likely to limit new vehicle supply with curtailments of production.
• Recessionary Market Conditions: FY22 sales can be dampened with the current recession, reduced disposable income, and subdued consumer spending. Moreover, the increase in robo-taxi’s and uber can also decrease the unit sales.

Now we will analyse some key fundamental and shareholders statistics of Vertu Motors PLC.

Recent News and Regulatory Developments

• 19 May 2021: Stellantis (of which Vertu operates 27 sales and aftersales franchises and outlets) unveiled the intention to issue a notice of termination for two years of their present franchise dealer agreements on 31 May 2021. VTU is currently undertaking expansion of contract and confident that the reorganisation would have a positive impact on the Group’s operations.
• 4 May 2021: CIP Merchant Capital Limited acquired 1,549,924 shares in Vertu, representing a 0.42% stake for a consideration of nearly £625,553.

Financial Highlights for the year ended 28 February 2021 (as on 12 May 2021)

(Source: Company Presentation)

• VTU delivered FY21 results ahead of the market expectations, supported by enhanced digital sales capabilities via the Click2Drive technology platform, growth in sales outlets, and a reduced cost base.
• Since 1 March 2020, 18 sales outlets have been added and 3 franchise partners (BMW Motorrad, MINI and BMW) were also included in the portfolio.
• Despite the lockdown restrictions and showroom closures, VTU delivered 38,446 new and used vehicles from 1 January 2021 to 31 March 2021, underpinning a strong start to FY22.
• Considering the Government support received during FY21, no final dividend was recommended.
• VTU has a strong asset base, substantiated by net tangible assets per share of 50.2 pence in FY21 (FY20: 46.0 pence).
• The Company also delivered a record free cash flow of £48.4 million during FY21 and ended FY21 with adjusted net cash of £1.4 million against the net debt of £2.8 million in FY20.

(Source: Company Presentation)

Financial Ratios (FY21)

Share Price Performance Analysis

   (Source: Refinitiv, Thomson Reuters)

On 20 May 2021, at 8:35 AM GMT, Vertu Motors PLC’s shares were trading at GBX 45.00, up by 1.12% against the previous day closing price. Stock 52-week High and Low were GBX 78.75 and GBX 20.10, respectively.

VTU's price is trading with higher tops and higher bottoms formation, indicating an upside direction for the stock. Prices are sustaining above a downward sloping trend line breakout level for the past 4 months and recently broke an important resistance level of GBX 43.30 by an upside, further supporting an upward trend. On a weekly chart, the momentum indicator RSI (14-period) is trading in the positive zone at ~67.83 levels. Prices are trading above the trend-following indicators 21-period SMA and 50-period SMA with a positive crossover, supporting a positive stance for the stock. On the lower side, the major support for the stock appears at GBX 35.60 level.

Note:  The orange line represents the trend line, while the black line in the chart depicts RSI (14-period). The blue histograms at the bottom of the chart indicating weekly volumes. The green and red lines represent the 21-period SMA and 50-period SMA, respectively.

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Business Outlook Scenario

VTU has established a solid start to FY22 with a record level of trading profits in the two months to April 2021. Therefore, the Company expects to report FY22’s adjusted profit before tax in the range of £24.0 million to £28.0 million. Moreover, the Board is optimistic about the recommencement of dividend in January 2022. The reopening of showrooms in April shall pent up the vehicle demand, while the reduced supply amid semi-conductor shortage is a concern. However, the Brexit uncertainties are now far behind and the Company is well-positioned to capitalise on the opportunities lying with vehicle electrification in the long run. Group’s FY21 results have already beaten analysts’ forecast, while lockdown easing and showroom reopening with improved customer proposition and considerable digital expertise shall support this fifteen-year-old entity with a consistent strategy. Therefore, the prospect of the Group seems bright with its strong balance sheet, asset base and manufacturer relationships, while there are attractive market opportunities in the UK motor retail domain.

 (Source: Company Presentation)

Based on the improved financials, healthy balance sheet, strong asset base, encouraging industry dynamics, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Vertu Motors PLC at the current market price of GBX 45.00 (as on 20 May 2021 at 8:35 AM GMT) with lower double-digit upside potential based on 10.23x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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