Vertu Motors

Deep-Value and Reopening

In this edition I’m very humbled to have investor JB (link) publishing a Deep-Value and Reopening case on my blog: Vertu Motors Plc.

Mixing Value and Growth he did a great pitch on Nekkar $NKR with a return of +120%, in only 7 months.

If you enjoyed this pitch make sure to send him a proper Thanks and a Follow on Twitter (link)

Alexander Eliasson

Vertu Motors

·         Vertu Motors plc was formed in late 2006 with the aim to acquire car dealerships throughout the UK. The founder, Robert Forrester, formed the entity together with former colleagues and floated a tax shell on the AIM market. Robert owns ~2% of the company which has a market cap of ~£160m today (=equivalent to around £3.2m).

·         The company today has ~150 dealerships throughout the UK with a broad portfolio of around 20 brands. Many of their sites operate so-called multi-brand facilities, meaning that Vertu can sell and serve several car brands at the same site. Only back in 2014, the company operated around 100 dealerships and have since been active in doing acquisitions and consolidate the industry which they are very clear that they aim to continue doing in the future.

Locations

·         Vertu operates a under a multi-banner strategy with their biggest majority being operated under their mass-market brand, Bristol Street Motors that was first incorporated in the early 1900s. In addition, they operate Vertu Motors with car brands such as Jaguar, Mercedes Benz, BMW but also MINI, Kia, Honda and Renault among others. In addition they have Macklin Motors (Scotland) and Farnell (Jaguar and Land Rover in North of England).

·         Most recently, the group acquired 12 new outlets for BMW and MINI, which will trade under the Vertu Motors banner. The Business was acquired from The Cooper Group Limited, part of Inchcape for total cash consideration of £18.7m and financed through cash and a 20y mortgage on the real estate from BMW Financial Services. In my view this is a great deal for Vertu. In a situation where competition is strapped for cash after having been closed more than 8 out of the last 12 months due to covid, Vertu’s strong balance sheet came to good use and we should see improved results going forward. Adding scale is incredibly important as it creates better bargaining power with OEMs, scale in terms of marketing where top-of-mind awareness is important and also enables further growth in the profitable aftersales segment.

So why is the company interesting to look at now after half a decade where the stock has done nothing but go down?

1.       Brexit has now cleared. There is less uncertainty and investors have once again started to look at the UK stock market which has been left for dead since the vote. The trading deal between EU and UK is set and there is less uncertainty.

2.       Household savings in the UK has skyrocketed in the last 12m as people have saved their money in absence of leisure spends. Financial Times had an article around this in the last week and by living in the UK, I can say that the mentality is that people are ready to spend some serious dough! I don’t think it’s unreasonable to assume that some of this will find its way to the UK car dealerships as people might be willing to invest (consume) their money in a car. As people familiar with the industry know, the money is not made from selling the cars, but from repairs. This will give Vertu the ability to generate additional profits over the next 5-10y. In addition, as cars get more advanced in terms of tech, the threat from smaller independent dealerships subsides as the float is renewed.

3.       New car registration has had a few bad years following the strong recovery from 08/09. I believe the risk of young people not having cars is slightly exaggerated and with more people moving from the city centres to the countryside where they instead buy a house (and a car?) will help offset this.

UK new car registration (2003-2020)

4.       Vertu Motors has an impressively stable margin profile and the stability in earnings is something that I find extremely attractive. The gross margin has trended between 12.5% and 10.8% since 2008, meaning that we’ve had one of the worst financial crisis and a pandemic during these years. The company updated the market in March around their performance and me knowingly, there are very few retail businesses with a  significant brick-and-mortar footprint that have managed to perform this well:

·         Board expects the Group’s trading performance for the year ended 28 February 2021 to be in line with current Analysts forecasts of around £23m at the adjusted profit before tax level (29 February 2020: £23.5m)

·         Group revenues grew by 4.1% in the Period, reflecting the impact of significant acquisition activity by the Group in 2020

·         29 outlets added to the portfolio since 1 January 2020

·         Delivered growth in like-for-like used vehicle margins and gross profit generation

·         Group’s like-for-like new retail vehicle volumes declined 13.3%, in line with the market, with stronger margin retention exhibited

·         Like-for-like new commercial volumes rose 34.0% in the Period, significantly outperforming the market

·         Like-for-like service revenues from retail customers up by 5.3% in the Period

5.       The company entered the pandemic with a net cash position, arguably being overcapitalised, but have throughout the last year been able to acquire new dealerships from distressed sellers and I’d expect this to bear fruit in the next years with increased market share as result. This is exactly what you want as shareholder – aggressively acquiring through the bottom of the cycle.

6.       Vertu Motors are very acquisitive and it’s reassuring that dealerships once acquired improve performance indicates that the management team are great operators.

·         There is a clear difference in the gross margin profile of the different segments with aftersales being the largest profit contributor despite only contributing with less than 10% of sales.

·         In recent years there has been a strong pick-up in gross margin for aftersales and it is clear that the aftersales segment is likely to remain around 9% of total sales, as this ratio hasn’t changed over the last 8 years.

·         The company has been able to grow its gross profit by around 12% per year over the same time period.

7.       Profits are now ready to grow coming out of covid and the valuation is dirt-cheap.

·         The company has guided for underlying PBT of £23.5m for FY-21 (ending February 2021) and that revenue increased by 4.1%. This is nothing short of amazing given that the car dealerships have been closed for vehicle sales and only operated its service business. 

·         Vertu has managed to develop its online sales business, something they already worked on before, and we have seen very good results from this. I would argue that this also makes the business more resilient going forward against disruptive online market places and being able to offer test-drives as well as broad selection I think is important for potential car buyers. The threat from pure-play online competition should be much less than for example apparel retail.

·         Management also says that they have been able to cut costs by £10m during the pandemic through continuous work on automation in back office as well as general cost-cutting. They don’t expect much of this to return, but we will see how this develops over the next years.

Valuation

·         The company has net debt of £5-10m on the balance sheet and the market cap is £168m which gives an Enterprise Value of £175m. I expect the company to do around £32m of EBIT for financial year 2022 which gives a valuation of ~ 5-6x. Even if calculate the year of the pandemic (the company reports March – February) which pretty much captures the whole show, the stock is trading at ~7.5x.

·         The shares are trading as if the company is going bust and I’m amazed when looking at other ‘re-opening plays’ trading on higher EV’s than pre-pandemic but with a severely impaired balance sheet that will take years to pay off debt.

·         In Vertu, you have a company trading to a low-single digit profit multiple with a clean balance sheet and an owner-operator and founder steering the ship.

·  Robert has been able to aggressively acquire dealerships throughout the crisis and I believe we can expect Vertu to continue to take market share.

·  The company also has tangible book value in the dealership properties defending the whole market cap and then some. It’s way too cheap and the share is worth considerably more than 100p per share.

Disclaimer: the author owns shares in Vertu Motors Plc

Me, not the author but the owner of this blog, also owns shares in Vertu Motors Plc @ 5% of my portfolio. Although not obliged to by law, I’ll not sell any shares within 30 days of this publication.

Thank you for reading,

Alexander Eliasson

Disclaimer

- This is not investment advice and I recommend you to read all the pages regarding ‘Risks' in the annual report (link).

- Before contemplating any investment of any kind I recommend you to contact a licensed financial advisor which will provide you with the proper advice.

- This article may contain factual errors.