Small Cap Value Report (13 May 2015) - VTU, CAMB, CAU, ZTF

13th May '15 by Paul Scott

8 comments 19627 reads

Good morning!

After looking at good results from Cambria Automobiles (LON:CAMB) yesterday, another chain of car dealerships has reported today, so let's start with that.

Vertu Motors (LON:VTU)

Share price: 58.6p
No. shares: 340.9m
Market Cap: £199.8m

Final results - for the year ended 28 Feb 2015 are out this morning. In a similar vein to Cambrian, Vertu is growing by acquiring additional dealerships, although it's about four times the size of Cambrian by turnover. The number of sites that Vertu operate rose from 106 to 116 in the year being reported.

Headline figures look good - turnover up 23.2% to £2,074.9m, adjusted profit before tax up 25.7% to £22.0m - as you would expect in this sector, a wafer thin profit margin of only 1.1% here. That is lower than the 1.4% reported yesterday by Cambrian in its interim results - it's a little surprising that the larger chain (Vertu) achieves the lower profit margin.

My main concern with this sector, as mentioned yesterday, is that car dealers are enjoying boom times at the moment, due to ultra low interest rates stimulating demand, recovering consumer confidence, and favourable exchange rate movements recently (making European imports much cheaper). So if these dealerships can only squeeze out just over 1% profit margin in the boom times, where will that leave them once demand slides back to more normal levels? Although each new car sold does carry a tail of decent margin work for the servicing & warranty work. That's what we're told anyway.

Earnings Per Share (EPS) - adjusted earnings per share rose 9.8% from 4.69p to 5.15p. Looking at the adjustments, they seem rather tenuous to me;

Amortisation of intangible assets of £405k (doesn't seem to be related to goodwill, as the accounting treatment of that seems to have changed to just an impairment review).
Share based payments charge of £645k - this is part of employee/Director remuneration, so it needs to be factored into the valuation, not ignored.
Exceptional charges - none this year (good), but £1,180k last year, so I suppose this is acceptable, as it will help give a reasonable comparison year on year.

Therefore I am more inclined to value the shares on the reported 4.87p EPS, and not the adjusted EPS figure of 5.15p, although as with many things that's a personal judgment that each investor is free…

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extrader

13th May '15

Hi Paul,

Thanks for the write-up.

I've never looked at car dealerships and am surprised at the wafer thin margin, especially if this includes a tail of decent margin work for the servicing & warranty work.

On the face of it, it would seem they're maybe making almost no money on the vehicles, only on the after-sales. In other words, a Razor/razorblade business model.

With the risk that - in leaner times - (a) sales of new cars will fall and (b) people will have their services done - if at all - elsewhere.

David probably likes the property angle ;-> !

ATB

V4Value

Paul,

It will be interesting to see if there is any kicker with the pension reforms. Will all those pensioners be buying their Lamborghinis or not? We'll have to wait and see, but I do recall analysts saying car dealers were reaping the benefit of PPI claims so this should have even more of an effect? Although I'm guessing it will be the Dacia and Kia dealers that will benefit rather than Supercar dealers!

simoan

Profit margins have always been low in car retail. However, historically margins a shade over 1% look low given the benign economic conditions. Out of interest I looked back at the European Motor Holdings last set of results in 2006 and they maintained margins >1% higher than Vertu and Cambria have reported. Anyone meeting management might like to ask why margins >2% no longer seem possible?

We all like the property angle!! IMHO it's one of the chief attractions and the solid asset backing negates the downside of the low margins. Jack Petchey, a well known shrewd property investor used to have significant shareholdings in EMH and Lookers through his company Trefick Limited.many years ago.

Julianh

If you need a comparative for Cambrian and Vertu, Lookers is an interesting proposition. Operating margin is 2.44% (still low but better than 1%) and it's got a stock rank of 96 and passes 5 of Stockopedia's stock screens. It's a much bigger beast than either of the two you have looked at today - Market Cap over £600M

14th May '15

Hi Julianh,

I believe Paul was considering net profit margin, which is not the same as operating profit margin. Lookers last set of full year results shows a net profit margin of 1.95%, still a lot better than Vertu or Cambria. It would be good to better understand the reasons for this because if Vertu and Cambria can get margins up towards 2% it will make a big difference to the bottom line.

Si

kenobi

The other issue with car dealers, is that there have been some big influxes of cash into the economy of recent years, associated with miss selling scandals, we've had endowments, ppi etc, this had made large amounts of cash appear in peoples laps. (not interested in whether deserved or not, more interested in will it continue ?) , it seems ppi is coming to an end. I have a friend in a major travel co, who told me that they thought their strategy was really working and the business was growing until it seemed to stop. and looking back they found that rises in their turn over corrolated with mis selling payouts rather than their great changes of strategy. Because obviously people getting a windfall are more likely to spend it perhaps on a flash holiday, or ..... after not changing the car for a few years, perhaps a new car ? Just something to consider in this, and perhaps other cases,

K

underscored

Yes and median PPI payouts match very nicely with the down payment on PCP deals.

Small Cap Value Report (13 May 2015) - VTU, CAMB, CAU, ZTF

Vertu Motors (LON:VTU)

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Paul Scott

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