- Market for used vehicles worsening
- Analysts halve full year profit forecasts
- First half pre-tax profits tumble 80%
Used car retailer Motorpoint (MOTR) reported a plunge in profits for the half to September 2022 and warned falling consumer confidence was set to reduce UK used car sales ‘for the foreseeable future’, an alert that sent the shares skidding 15% lower to 151.5p.
The nearly-new car specialist also guided towards a near-80% plunge in first half pre-tax profits to £3 million as it lapped a prior year period of record margins, ramped up its strategic investment spend and paid a higher interest bill.
VOLUMES GO INTO REVERSE
While demand remained strong for much of the first half with market share gains and vehicle price inflation driving Motorpoint’s sales up 30% to a record £785 million, recent trading has proved more challenging with waning consumer confidence hurting the used car market.
Sales by volume were down around 9% in September, a decline management pinned partly on ‘adverse economic news flow and political uncertainty which continue to undermine already fragile consumer confidence’.
The used car market is being ‘significantly’ affected by a combination of ‘rising inflation, interest rates, consumer uncertainty and worldwide vehicle supply chain challenges’, bemoaned Motorpoint, while broker Shore Capital believes early October saw a similar rate of volume decline.
MATERIAL DOWNGRADES
‘Macroeconomic conditions continue to worsen, which is causing increasing consumer uncertainty, and it is therefore likely that this will reduce used car sales volumes in the UK for the foreseeable future,’ said Motorpoint, which continues to invest in strategic growth initiatives while aiming to remain profitable and cash generative.
‘Although the company does not provide specific profit guidance, it believes these macro factors will continue to challenge financial performance in the year to March, the extent of which is difficult to predict.’
In response, Shore Capital slashed its pre-tax profit forecasts for the years to May 2023 and 2024 by 50% and 60% to £6.5 million and £6.6 million respectively.
‘Medium to long term prospects remain encouraging in our view,’ commented the broker, ‘supported by management’s ongoing commitment to strategic investment, however short term visibility has materially decreased.’
Liberum Capital halved its 2023 taxable profit estimate to £7 million, stressing that given its focus purely on nearly new cars Motorpoint was feeling the pain of supply shortages and a difficult demand environment ‘more acutely than franchised dealers that have benefited from strong new car margins and aftersales to offset used car pressures.
‘Management is steadfast that it has the right strategy to drive longer-term profitable growth, with market share gains through the first half supporting this view. Market share gains made now should strengthen the Motorpoint brand and increase the level of repeat business. The investment being made in digital should lead to material productivity gains. Online disruptors such as Cazoo (CZOO:NYSE) are clearly struggling, while Motorpoint remains profitable and with a net cash position.’
AJ Bell investment director Russ Mould said: ‘The scale of the drop in volumes in September is somewhat alarming, though not all that surprising. When household budgets are under such acute pressure it is much harder to commit to spending on a really big-ticket item like a car, instead garages may be busy keeping older vehicles on the road for longer.
‘The market will not be reassured by the lack of any visibility from Motorpoint on what next year might look like. Management deserve some credit for holding their nerve and continuing with strategic investments to grow market share, although at some stage investors may look for a gear change to ensure the company has a healthy buffer with the road ahead unlikely to be a smooth one.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
