Vertu Motors has delivered a robust set of H1 results, demonstrating clear outperformance. We are maintaining our underlying trading assumptions but incorporate the impact of IFRS 16 into forecasts. This has a net £0.4m impact to adj. PBT forecasts but is cash and net debt neutral. While the outlook is no doubt uncertain, we believe the Group is well positioned to cope with market uncertainty given its strong balance sheet, rising FCF generation (FCF yield in 2021E of 9.9% rising to 11.4% in 2022E) and strong track record of delivering disciplined growth.
- Interim results: Vertu has delivered resilient H1 results demonstrating clear market outperformance against what remains a difficult economic backdrop as well as relentless cost pressures as previously flagged. Revenues were +5.6% YOY, and +2.3% on a LFL basis. Gross profits were +4.1% in absolute terms, with gross margins broadly stable at 10.5% (10.6% in H1 2019). Gross margins in new and used vehicles softened by 30bps and 70bps respectively driven by the tougher trading environment, albeit this was partially offset by a 60bps improvement in gross margin in Fleet and Commercial and 360bps improvement in aftersales (80 bps on a like-for-like basis which excludes the impact of the Ford parts reorganisation).
- Key performance drivers: The group saw a 10.1% decline in new car units on a LFL basis, albeit with GPPU up to £1,418 from £1,365 last year driven by strong pricing disciplines and hitting OEM targets to earn bonus income. The Group outperformed the market in new fleet cars, growing like-for-like volumes including agency volumes by 13.8% against a decline of 1.3% in the UK fleet market. In used, like-for-like volumes and revenues were up 1.6% and 3.3% respectively despite a softening consumer environment. The Group achieved an 8.5% increase in the Group’s like-for-like service revenues in the Period. The like-for-like gross margin percentage on vehicle servicing rose to 76.9% (H1 2018: 75.8%).
- Forecasts: We leave our underlying trading assumptions unchanged but incorporate the impact of IFRS 16. This has a net £0.4m negative impact on adj. PBT forecasts but is cash and net debt neutral. We now expect adj. PBT in 2020E of £23.5m going to £25.0m in 2021E. We incorporate the impact of disposals YTD, increased financing costs and lower working capital into our cash flow, resulting in lower net debt number for the full year. In our view, maintaining forecast at this juncture is a signal of the strength of the group’s performance YTD and potential for outperformance compared to the sector in the full year results.
- Investment view:We believe the long-term valuation remains compelling at a 2020E P/E of 6.5x falling to 6.0x in 2021E and an EV/EBITDA of 3.1x falling to 2.9x with a dividend yield of c.5% backed up by our average implied intrinsic value per share of 72.4p and net tangible assets per share of 46.1p.
*Vertu Motors is a NOMAD and Broking client of Zeus Capital Limited
