Vertu Motors “has had a strong start to the year” says Zeus

Vertu Motors plc (LON:VTU) has released an AGM Trading update that communicates a continuation of the strong trading announced on 11 May. The trends of constrained supply and high margins continue. We leave forecasts unchanged today, but this positive update for the first third of FY23 helps to underpin our full year forecasts.

¨ Trading update: The trends discussed in our 11 May note continue for Vertu. Supply constraints hamper sales volumes but are keeping margins high in new retail and fleet channels. Sales volumes are also down in used cars compared to a period of pent-up demand last year. However, these constraints have led to the Group maintaining strong gross profit per unit on used cars, which is above prior year levels. Revenue in Aftersales, which carries a higher gross margin, is above prior period levels due to additional workings days in May 2022. The Group also continues to make progress in its parts departments and accident repair centres. These positive statements from Vertu, c. 4 months into the financial year, increase the confidence in our full year forecasts.

¨ Outlook and forecasts: Vertu has had a strong start to the year, but there is not enough visibility to upgrade full year numbers, so Zeus forecasts are unchanged today. The latest monthly CapHPI data on used car prices shows trade values decreased 0.7% in June, a slower pace of decline than in April and May (2.1% each). This supports our thesis that used car prices will continue to stabilise, but supply constraints should limit the risk of a crash in prices. May 2022 data from the SMMT highlights the extent to which supply is still impacting sales volumes in 2022, with YTD new car registrations 8.7% behind YTD 2021, where the UK was in lockdown for most of that period. Vertu anticipates a gradually improving supply situation in the coming months. Inflation and low consumer confidence are expected to be headwinds to consumer demand, but we think large order books for new vehicles, coupled with the strong trading so far this year, supports our forecasts.

¨ Share buyback programme: On 7 June, Vertu announced a further £3m share buyback programme that will run to the end of FY23 at the latest. We have not yet included this in our forecasts but anticipate it will have a 1-2% positive impact on adjusted EPS in FY23-FY25.

¨ Valuation: Based on our forecasts, Vertu Motors now trades on 7.1x P/E, 2.2x EV/EBITDA and has an FY23 dividend yield of 3.4%. The share price is 19.2% below FY22 tangible net asset value (TNAV) per share of 66.8p and we forecast this to rise to 72.8p by FY23 year-end. We have consistently said TNAV should be seen as a floor to the value, with other Zeus analysis (SOTP, mid-cycle P/E, DCF) providing an average value estimate of 100.2p per share. The Group has a strong balance sheet, with net cash of £16.2m at FY22 year-end that is forecast to grow to £31.2m by FY23 year-end. Cash balances, debt facilities, and strong cash generation provide the firepower for Vertu to execute future M&A that could provide upside to our numbers.

Summary financials

Price53.1p
Market Cap£189.8m
Shares in issue351.6m
12m Trading Range38.7p– 75.8p
Free float95.50%
Next EventInterim results – 5 October

Financial forecasts

Yr end Feb (£’m)2022A2023E2024E2025E
Revenue3615.13680.83828.43981.9
yoy growth (%)41.91.844
Adj. EBIT87.743.44549.7
Adj. PBT80.735.43640.7
Adj. EPS (p) ful dil.17.27.57.28.1
DPS (p)1.71.81.92
Net cash (excl. leases)16.231.242.853.8
P/E (x)3.17.17.46.6
EV/EBITDA (x)1.42.221.8
Div yield (%)3.23.43.63.8
Source: Audited Accounts and Zeus estimates
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