A trading update from Vertu Motors Plc (LON:VTU) confirms it is on track to hit market consensus for 2020E. The Group continues to outperform in used cars, fleet and aftersales and is showing good discipline in new cars despite the difficult backdrop. We are taking a more cautious approach to our 2021E and 2022E forecasts impacting EPS by 4.2% and 3.5% respectively, albeit believe the Group is well positioned to emerge as a sector winner.
- Trading update: Vertu has released a trading update for a 5-month period to 31 January 2020 ahead of final results to the year ended 29 February 2020. In essence, Vertu is trading in line with consensus expectations for February 2020. This was achieved through discipline, sector leading systems and aided by its strong balance sheet, which has allowed it to complete a number of value-enhancing acquisitions that will benefit the future.
- Key performance drivers: Group revenues were -2.1% LFL during the period. Group Services revenues during the 5-month period to 31 January were +5.4% on a LFL basis, with aftersales margins rising from 46.3% to 44.7%. In used cars, Vertu has been balancing volume and margin to maximise gross profit in this area. LFL volumes fell by 2.3% during the 5-month period, with LFL gross profit per unit advancing by 6.7% as margins strengthened. The new car market has remained under pressure during the period, with UK private registrations -5.4% during the period. For Vertu, LFL volumes were -9.4% driven by high declines within some of its volume brands. Motability volumes for Vertu were +1.9% during the period, which compared to the market of +5.2%. Strong outperformance continued in Fleet, with LFL volumes +13.6% vs. the market +4.1%. Vertu benefited from the decision to invest in fleet capacity allowing it to drive this volume and gain share. Costs also continue to be well controlled, albeit strong investment in marketing continues to grow future market share.
- Forecasts:We have maintained our headline forecasts in 2020E (slightly above consensus) in line with guidance. For 2021E and 2020E we have factored in the change in the parts arrangements with Vauxhall. We have also taken a more cautious approach on the new car market from 2021 both in terms of growth and margin as well as supply growth and also used margin pressure due to F&I. We have not made any explicit assumptions based on the potential for Coronavirus to impact supply and potentially short-term consumer demand.
- Investment view:We believe the long-term valuation remains compelling post recent share price weakness with Vertu Motors trading on a 2021E P/E of 6.1x and 5.9x in 2022E with an adjusted EV/EBITDA of 2.1x and 1.9x backed with a FCF yield in excess of 20% and a dividend yield approaching 6% following the recent share price weakness.
