Zeus Capital Analyst Q&A discussing the UK motor sector

The UK motor sector is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: I wanted to tap into your knowledge of the motor sector this morning, if I may? How have dealers faired during lockdown?

A1: Obviously, these are businesses that have got high fixed cost base and low margins so we were always anticipating an element of cash burn and increase in debt coming through this because they clearly had to completely lockdown the business for a period of time.

However, I think as dealerships have been allowed to reopen from the beginning of June, there’s definitely been signs of pent up demand. Clearly, most or all dealerships will have lost money from March through to April but we believe a number of dealer groups would’ve traded profitably in June which is good news.

Q2: I was just going to ask, is there much sign of pent up demand?

A2: I think there’s definitely pent up demand in terms of aftersales, MOT’s being due, repair work being done that needed to be done, clearly a lot of cars hadn’t been used for a period of time and that can cause problems as well. So, we’ve definitely seen pent up demand in aftersales.

The used car market appears to be very strong at the moment as well. Clearly, there was some pent up demand in the new cars market as cars due at the end of March didn’t get delivered so that’s been happening now, during June.

We also think there’s probably been some incremental pent up demand and that’s probably come from consumers that don’t really want to use public transport and perhaps looking at smaller vehicles to get to work as the workplace opens up as well.

Q3: You’ve been holding back on forecasts for obvious reasons but when do you think you’ll bring them back?

A3: I think we still have to take it on a month by month basis, I’ve said June would’ve been quite good for dealers, certainly taking a lot of people by surprise, but I think there’s still challenges ahead.

There’s still a lot of people back from in furlough which they have to decide what to do with, I think clearly there is signs of pent up demand and they’ve got to bring resource back in order to fulfil that.

I think as the fleet market restarts as well, that can consume working capital so I think there’s every possibility that the cash burn could increase during the summer months as dealerships start to get back to full capacity.

I think the natural point to start looking at forecasts is after the September market so the September new car market typically is 15-17% of annual registrations and that would give us a good idea of what underlying demand is like in the new norm, post-COVID. So, I think once we can see dealerships being open for 2/3/4 months and what the demand’s like post-COVID, I think that should allow us to have a stab at bringing forecasts back into the market.

I think at the moment, it’s just too early, clearly dealerships have only been open a month at the moment so I think it’ll be difficult to put any meaningful forecasts in the market based on a month’s trade.

Q4: Just looking ahead, what are the long term attractions of this sector?

A4: Clearly, it’s not easy at the moment, June has got off to a better than expected start but there’s a lot of long term questions in terms of unemployment, what will that do to long term demand etc. This is a question a lot of sectors have to face, we’ve also got Brexit on the horizon and that can impact supply and demand channels in both new and used cars.

However, I think the attraction to this market is difficult, is complex, and I think for those winners that emerge through this with a relatively strong balance sheet, we think 20-25% capacity will be taken out of the market, probably more quickly now due to COVID.

So, I think the market will consolidate, I think the prize for the winners will be bigger and clearly, it is a dynamic sector, I think automotive is responsible for a lot of jobs, the retail market is critical as well. We’re going to see a lot of change in this industry but I think for those that are ready for that kind of change, the prize at the end will be bigger.

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Zeus Capital

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