Marshall Motor Holdings (LON: MMH) has delivered solid results, which are 1% ahead of our forecasts at the adjusted PBT level. The performance across the board demonstrates outperformance vs. the market, with the change in dividend policy a sign of confidence in its future balance sheet and cash generation. We are maintaining our below consensus estimates at this juncture but believe MMH offers strong value at current levels following this record performance.
Final results: MMH has delivered final results to December 2018 as anticipated with adjusted PBT coming in 1% ahead of our expectations at £25.7m (see exhibit 1). Revenues were broadly in line with our forecasts, with adjusted EBIT 5% below albeit interest costs came in lower at £6.4m vs. our £8.3m forecast. Its important to note that these results exceeded last year’s record performance against a tough market backdrop, Cash conversion was again strong at 88%, with net debt slightly higher vs. our forecast albeit modest in the context of the capital investment of £23.8m in the core estate. The balance sheet remains very strong with net assets of £200.4m (257p per share) after a £9.3m goodwill impairment backed with £125.3m of freehold and long leasehold property. ROCE (pre-tax) was a very respectable 12.8%, which compares to our forecast WACC of 9%. The key positive surprise was the dividend and move to a cover range of 2.5-3.5x from 4-5x implying a 2018 dividend 22% ahead of our forecasts implying a yield of 5.4%.
Key performance drivers: The performance in used cars was very robust with LFL volumes +2.3% with revenues +8.1% backed with a 32bps improvement in margin, which we believe to be very creditable against its peers. Aftersales also continued to grow with LFL revenue +2.3%. New car unit sales were -8.2% on a LFL basis (revenues -4.5%) due to the well-publicised impact of WLTP and diesel, albeit margins were maintained, which we view as a positive, especially given its exposure to premium diesel brands. There was also evidence of disciplined cost managed despite cost headwinds with LFL operating expenses as a % of revenue marginally down at 10.1%.
Forecasts: While we recognise our 2019E and 2020E forecasts are at the lower end of the consensus, and numbers management would expect to beat, we are maintaining our assumptions for now given the political and economic uncertainty. Our net debt forecasts will move up slightly due to the higher dividend and base in 2018A, albeit with FCF running at c£10m per annum, MMH is in a strong position.
Zeus Valuation: MMH is trading on a 2019 P/E of 7.4x and an EV/EBITDA of 3.4x based on below consensus forecasts. The group has >£100m of freehold and long leasehold assets on the balance sheet providing strong asset backing. This is supported by progressive dividend yield in approaching 5%, and we also anticipate FCF generation of c£10m per annum from 2019 following significant capital expenditure undertaken in recent years, which also looks attractive to us in the context of the current share price.
