Despite the headwinds facing the UK new car market, Vertu Motors (VTU:AIM) managed to trade in line with market expectations during an exceptionally difficult year ended 28 February 2019. So why then, are the lately unloved shares in reverse today, marked down 4.1% to 37p?
The negative catalysts appear to be management’s understandable caution on the outlook ahead of Brexit, as well as changes to the way manufacturers distribute parts which are expected to ‘reduce the group’s ongoing profitability by £0.8m’.
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The year just ended was tough for the industry and for copiously cash generative, property asset-backed Vertu, which floated on AIM in 2006 and has since grown organically and via acquisitions into the UK’s sixth biggest automotive retailer.
TAKING MARKET SHARE
Facing into a tough new car market, Vertu Motors’ material exposure to volume brands proved unhelpful and the company is also facing wage and property cost pressures.
Yet in the five months to 31 January, sales were slightly better than expected, with Vertu’s 6.8% slide in like-for-like new car volumes outperforming a 9.8% wider market reverse implying market share gains for the Gateshead-headquartered group.
According to the Society of Motor Manufacturers and Traders (SMMT), the UK new vehicle market recorded 2.37m registrations in the 12 months to 31 December 2018, a 6.8% decline on 2017 and the second year of decline from the 2016 peak of 2.69m. These market reductions were driven primarily by the impact of currency on the profitability of manufacturers importing vehicles into the UK and the introduction of new EU-wide emissions regulations (WLTP).
Encouragingly for Vertu however, its high margin after-sales business continues to act as a growth engine, while in a more difficult used car market the retailer’s deliberate tactic of taking market share drove like-for-like volumes 4.8% higher in the five-month period, albeit at the expense of margin.
On balance, Liberum Capital likes what it hears and even increases its full year 2019 pre-tax profit estimate by 1% to £21.9m, implying a 23% year-on-year decline.
FORD HIT IN FOCUS
Bears are seizing on the news that a change begun by Ford in the way that parts are distributed to retailers will reduce Vertu’s ongoing profits by £800,000.
Under the traditional method, Vertu would have held stock and borne employees costs. But under the new system retailers operate parts hubs on an agency basis where the stock risk and staff cost are borne by the likes of Ford, with Vertu receiving a fixed handling fee.
These changes are a way for car manufacturers to gain further control over parts distribution and capture more of the margin and it is possible that others will follow Ford down this route, but management’s discussions with partners suggest that there is unlikely to be any other change in full year 2020.
UNDERSTANDABLE CAUTION
Savvy automotive retail operator Robert Forrester, CEO, is unsurprisingly cautious on the outlook given the uncertainty cast by Brexit and the ongoing global pressures car makers are facing.
The good news is Forrester insists his charge ‘continues to be very well positioned to take full advantage of tougher markets which will, as has been the case in previous sector downturns, provide opportunities.
‘We have a strong balance sheet, underpinned by a property-rich asset base with low levels of debt, a clear focus upon capital allocation and we have an outstanding and stable team.'
Interestingly, Liberum stresses that a benign Brexit outcome, ‘even if delayed, could provide a double benefit of stronger sterling and consumer demand. In all scenarios, we think that Vertu is one the best placed in the UK to consolidate the market (with assets from Pendragon (PDG) and Inchcape (INCH) potentially coming on to the market at some point). We maintain our thesis that OEM margin pressures will lead to faster network consolidation which will benefit those dealers with the best operating track records and strongest balance sheets’, of which Vertu is most certainly one.
