Analyst Q&A with Zeus Capital: Cambria Automobiles (LON:CAMB)

Cambria Automobiles (LON:CAMB) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: Cambria Automobiles has released full year results for 2019, how do these results compare to your forecasts?

A1: The results are very impressive and don’t forget we’ve upgraded our forecasts several times during the year.

They’ve come in at adjusted PBT of £12.3 million and our latest forecast was £12 million so that’s 2.5% ahead of our upgraded forecast. That compares to £9.8 million last year which is 25.5% year-on-year growth.

Similar story on earnings in terms of, again, being upgraded several times during the course of the year and they’ve come in at 9.8p of earnings against 7.8p last year, again about 25% up year-on-year and 3% ahead of our forecasts.

Q2: So, what were the main drivers behind these results?

A2:  I think if you look at the business, they’ve performed within each core area of the group so new vehicles, used cars, aftersales, is all ahead of last year in gross profit terms which is good.

Mainly in new and used vehicles, it’s been driven by a very substantial increase in gross profit per unit and that’s been driven by the brand mix so they’re move to luxury and premium cars has paid off well and help their margins.

Not only that, and on top of a very solid aftersales performance, they’re performance on costs is also impressive. It’s very clear with a lot of retailers, cost inflation is clearly happening at the moment but in the case of Cambria, they managed to get their costs down so their operating expenses as a percentage of revenue has fallen from 9.6% to £9.3% during the course of the year. It shows that they’re a nimble operation in terms of getting initiatives done quickly.

So, it’s a combination of favourable mix but also good cost initiatives that delivered these results.

Q3: Given these results, have you changed your forecasts in any way?

A3: We have. As I said before, we’ve upgraded several times during the course of the year but given the outperformance in 2019, we’ve ticked up our 2020 and 2021 forecasts by about 3-4% at the adjusted earnings level.

So, we’re now assuming that the company will deliver £12.5 million of PBT to August 2020, £12.7 million in 2021 and we also introduce our 2022 forecasts for the first time and assuming £12.8 million. So, we’re not really assuming a lot of growth from here but we think that’s understandable given the current macro backdrop and clearly, the car market remains difficult as well so we have to bear that in mind.

Q4: Finally, what are you thoughts on Cambria Automobiles valuation?

A4: For us, the valuation remains compelling. As of yesterday, the stock was trading on a PE of 6 times and EV/EBITDA of 4 times and that is below the sector at the moment, we believe that’s at odds with the sector leading return on equity of 16%.

I think another interesting way of looking at this business is the normalised free cash flow that we see in this business and if we take out what we believe to be one-off working capital benefits, we still believe that the underlying free cash flow in this business is around £12 million. If you compare that to a market cap of £60 million, we think that’s pretty compelling at the moment.

So, we do think that the valuation is at odds with how they perform against the sector, against the cash generation and we also believe that the invested freehold asset base is north of £90 million as well so the market cap looks, to us, very low in that context.

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