I just don't see no Vertu no more

Friday, Jul 27 2018 by
9

I've owned Vertu Motors (LON:VTU) for a couple of years now from low 40s. I believed this to be a well managed business with the ability to improve returns on capital as it digests and streamlines all the acquisitions it has made over time. But the virtue I saw I see no more.

I feel that recent announcements from the company have been dissonant with my outlook. Summary:

1) I don't like that they are back on the acquisition trail without proving out a stronger ability to generate returns on invested capital in the recent downturn for the sector.

They held up okay but I was looking for a bit more progress. They failed to convince me that acquisition was return enhancing as well as revenue growing. Over time they have issued a lot of equity to make these acquisitions. They have generated excess returns above the issued equity - positive. But that can be explained by general price inflation in the motors - a negative from the perspective of DIY improvements and a potential sector specific headwind that can arrive in future (potentially asynchronous with other economic factors).

In addition, since their acquisition of Bristol Street Motors way back in the beginning the number of units they sell has stayed flat to even a bit down despite many acquisitions since. This volume loss comes from closing down and selling off units. It means that revenue increases have been driven by increase in price of units sold (partly explained by the point above re price inflation and partly as Bristol was second hand motor sales and they have added a lot of new motor sales through subsequent acquisitions).

I was aware of above dynamics on getting involved in the stock but believed that management were in a process of transitioning to a phase of extracting more RoC juice from historic acquisitions...and 2017 and 2018 were the time to show something special. That they didn't leaves me thinking they are just picking up commoditised industry returns.

2) I'm not impressed with what I see as a pro-cyclical acquisition strategy with recent Mercedes acquisitions.

The group has been a lower and mid range car focused business. A lot of Ford and Vauxhall. A little counter to my points in 1 above they deserve some credit for weathering the storm in this segment (premium held up really well) and keeping earnings up. It does show management discipline.

However, I feel that a good and confident capital allocating business would either hold tight or acquire more of these down at heal franchises looking to get bargain pricing. But they have gone after expensive Mercedes dealerships in last two acquisitions (splurging approx 1/4 of market cap to pick up this little extra bit of volume and revenue. IMO they're chasing the hot sector and paying hot sector prices. That doesn't fit right with their claimed approach. Its a sensible strategic approach to move towards industry copying brand exposure (a stated aim) but its got to be done at right time and with patience and discipline.

3) Heavy capital investment in Jag and Land Rover dealers comes to an end soon. That's a positive...but its not the end of the cash spend tunnel. Investments will be needed on other brands...maybe those new sparkly Merc dealers will need to do it if Mercedes feel that a slowdown in sales (if that happens) merits some re-imaging...or Ford/Vauxhaul lean on dealers to get their brand up with some flash making looks.

And back to point 2 in the context of point 3 too...they are paying top dollar on high end franchises in Jag and Land Rover.

4) Car sales and prices have been heavily influenced by credit innovation and availability. There's been a virtuous circle between increases in what consumer can afford as new car as a result (why Mercs are no longer exclusive cars and are more mass market afforded by ordinary Joes) and the resell price of secondhand.

I'm not forecasting that credit availability disappears. Its probably cemented as way we buy cars (I think its been the norm in Germany for a long time?). But there may be limited upside from it and the pricing escalator dynamic will go into reverse at some point. When it does it will increase the length of ownership as the financial maths means that buyers of new cars cannot put them back after 2 years on plan, have a little excess cash from the resale and refinance into a new plush car.

I'm not forecasting this is happening now...it just will at some point and if Vertu can't show that they are generating something idiosyncratic in the way of capital returns then they are caught in industry downdraft...with recent high end franchise acquisitions looking particularly bad capital allocation.

Why am I potentially selling at wrong time and price?

A cyclical upturn could see all boats rise. That can drive a double in rating of Vertu Motors (LON:VTU) on top of some earnings growth. But the points above mean that Vertu is also vulnerable to being a value trap if the cyclical winds blow another way. Of course it's property portfolio provides some backstop at the 40p mark...but there's no reason why if the market doubts the business model the share wont be at a discount to tangible book.

What do you think? I've seen many comment positively and I was amongst their number. Tell me where I'm wrongheaded and why I should buy again.

Best wishes
Paul


Filed Under: Car Dealership,

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Vertu Motors plc is an automotive retailer in the United Kingdom. The principal activity of the Company is the sale of new cars, motorcycles, and commercial vehicles and used vehicles, together with related aftersales services. The Company is engaged in the provision of management services to all subsidiary statutory entities. The Company operates a chain of franchised motor dealerships offering sale, servicing, parts and bodyshop facilities for new and used car and commercial vehicles. The Company also operates various franchise dealerships, such as Volvo, Volkswagen, Land Rover, Audi, Mercedes-Benz and Jaguar, and operates Honda dealerships in the United Kingdom. The Company operates approximately 125 franchised and over three non-franchised operations across England and Scotland. The Company's subsidiaries include Bristol Street First Investments Limited, Bristol Street Fourth Investments Limited, Vertu Motors (VMC) Limited and Grantham Motor Company Limited. more »

LSE Price
36p
Change
0.5%
Mkt Cap (£m)
135.6
P/E (fwd)
6.6
Yield (fwd)
4.6



  Is LON:VTU fundamentally strong or weak? Find out More »


3 Posts on this Thread show/hide all

mmarkkj777 28th Jul '18 1 of 3
2

I agree, unfortunately. I'm an ex holder.
Before joining Stocko, I used to filter for value and they always came up, so I bought them on a dip. I didn't lose really, other than the opportunity cost of not investing elsewhere. They may come good, but they seem more interesting in acquiring than in steady state performing (just my view, who knows how they will do in the future).

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Zipmanpeter 24th Aug '18 2 of 3

I also sold out at 50p. I think EVs are going to come faster than I once thought (govt now publically committed to phasing out diesel/petrol with specific dates, solar power costs tumbling), autonomous cars with build in radar to block bumps etc meaning less repairs; young dropping cars and happy with shared ownership.

Net bigger risk of them becoming (or being perceived as becoming!!) outdated.

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tony akram 8th Jan 3 of 3
1

I was a holder until recently but I am not sure if I have missed something

ie market cap is £136million yet on last full year accounts they had under tangible assets £198 m with £182m freehold property and long leasehold if this is the case does this mean they own property more than the current market cap !!!

If this is the case then is the downside somewhat protected I am sure I have been too simplistic in my approach but would welcome comments

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