Vertu Motors Analyst Q&A: Stronger balance sheet on the back of outperformance (LON:VTU)

Vertu Motors plc (LON:VTU) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: Vertu Motors have updated the market with a brief trading update which states that earnings are ahead of the prior year and analysts forecasts. Mike, can you just talk us through that?

A1: So, actually, what the company said was in an unscheduled trading update was earnings for this year to February ’21 will be ahead of the £18 million forecast at the PBT level which we’d previously had in. On the back of that, we’re increasing our number to £23 million which will be flat against the performance in 2020.

I think that’s an amazing achievement really given in the period we’re living through three national lockdowns and it’s obviously testament to how well managed this business is.

Clearly, there has been government support in terms of furlough, business rate relief etc. but I think to be in that kind of position given the uncertainty etc. shows how strong the business is and actually shows the demand that we’re seeing particularly in used cars at the moment.

Q2: What were the key drivers?

A2: There were multiple drivers to this really, there wasn’t one standout factor. When we updated our numbers in December, we assumed January and February would be loss-making months, they normally are in combination in motor retail, but obviously the underlying demand was stronger than we had expected. That was a surprise given we are seeing stronger lockdowns in certain local areas to contain the COVID variants at the moment.

Cost mitigation, cost savings was a big factor as well so I think management have performed ahead of expectations on this but they are still investing in areas like marketing to increase activities levels. Clearly, there was some government support that extended across as well as we went into the third lockdown, the furlough scheme was available and business rates holidays had been extended as well.

I think the company, and a lot of other motor retailers, have adapted very well, they’ve adapted their omni-channel retail model well by click and collect and that’s helped activity levels be stronger than we what expected really. Initiatives such as free home delivery and 14-day money back guarantee etc. in used cars has helped prompt those activity levels.

Also, I think because we are in a supply constrained environment, particularly with a weak new car market at the moment, that’s helping used car margins, used car markets have been very robust in the period as well.

Q3: Why do you consider Vertu Motors a ‘sector winner’?

A3: The balance sheet obviously is very strong and will be stronger on the back of this outperformance that we’ve indicated. I think the way the management team has navigated the business in very challenging conditions is a major tick in the box as well.

If we look at the valuation from a net tangible assets to share perspective, I think that’s very strong as well so we estimate that at about 48p per share in 2021 and will rise to 58p in 2023.

So, in our last note, we set a valuation of around 65p as they use that balance sheet strength to their advantage and we’re very comfortable with that.

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