Shares in cars and vans dealer Marshall Motor (MMH:AIM) reversed 2.6% to 150p on Wednesday despite issuing a positive trading update and moving into pole position as Volkswagen UK’s largest partner. Marshall will have 53 VW franchises after agreeing to buy a portfolio of VW and Skoda dealerships from Jardine Motor Group in a £22.3m cash deal.
This latest ambitious acquisition will be earnings dilutive in 2020 and 2021, which presumably explains today's negative share price reaction. However, this appears to ignore Marshall’s formidable track record of turning round underperforming dealerships.
MARSHALL’S LATEST STEER
Quoted UK car dealers have endured a torrid 2019. Uncertainty over Brexit has led to weak consumer confidence. Indeed, The Society of Motor Manufacturers and Traders (SMMT) forecasts a 2.8% UK new car market decline for 2019 and a 4.4% dip for 2020.
Dealership groups including Marshall Motor have also faced into cost headwinds and supply constraints caused by the implementation of additional emissions-related red tape.
Nevertheless in a positive update, Marshall Motor chief executive Daksh Gupta (pictured below) said his charge has ‘performed well in this challenging market’. He also stressed that the board’s outlook for the full year ‘remains unchanged’, rather impressive considering trading conditions weakened further in the fourth quarter.
ANOTHER COMPELLING DEAL
The update was bundled up with the £22.3m acquisition of a portfolio of Volkswagen and Skoda franchises from Jardine Motor Group. These businesses lost £3.3m and £2.8m in 2017 and 2018 respectively and will drag on earnings for the next two years until Gupta and his team can get them firing on all cylinders.
But the exciting news is these businesses have ‘excellent potential for growth and improvement in operating performance’ as part of Marshall Motor, which expects the deal to be ‘earnings enhancing from 2022 onwards’.
SHOW OF CONFIDENCE
Crucially, the acquisition turns Marshall into Volkswagen’s largest UK partner by number of locations, signalling the original equipment manufacturer’s (OEM) confidence in the AIM-listed group as a brand partner. It also further cements Marshall Motor’s position as Britain’s biggest Skoda retailer.
‘While the acquired businesses are currently loss making, we are confident in their future potential,’ insisted upbeat CEO Gupta. They are in ‘excellent locations that are contiguous to our existing Volkswagen and Skoda franchises and each site is fully compliant with the latest brand requirements.’
Gupta believes this is ‘an exciting time to extend our partnership with Volkswagen Group UK as the impact of its significant investment in electrification and mobility services will be demonstrated.’
Nevertheless, Zeus Capital downgraded its 2020 adjusted pre-tax profit estimate from £21.6m to £19.1m and its 2021 estimate from £22.3m to £21.2m.
Based on the broker’s 2020 forecast earnings and dividends of 19.3p and 8.5p, profitable, dividend paying Marshall Motor trades on an overly grudging prospective price to earnings (PE) ratio of 7.8 with a 5.7% yield, not to mention a discount to freehold and long leasehold assets of circa £125m that may pique the interest of value investors.
‘We remain comfortable with the long term investment case, the group has a solid track record of execution and is outperforming against the market,’ insisted Zeus Capital.
However, the broker also cautioned that while the election result has improved currency conditions and ‘may potentially positively impact consumer sentiment, economic conditions are largely unchanged and we expect the first quarter of 2020 to remain difficult across the market, as more favourable economic conditions take time to be realised and filter through.’
