Stock Brief - Vertu Motors (LON:VTU)
The Stockopedia community is an important driving factor of new investment ideas and individual equity analysis on the site. Plenty of knowledgeable contributors provide key insights on stocks of interest, or in areas of expertise, across different markets and geographies on a daily basis.
To focus more on community-led ideas, and in view of expanding our editorial coverage, we’ve decided to create ‘Stock Briefs’. These are shorter-form articles that will hopefully allow investors to quickly digest some of the key info about a security.
We have used our more rigorous Stock Pitch format to guide us on this, and we hope that our new ‘Stock Briefs’ will help provide a useful starting point for investors to carry out further due diligence.
Here’s an example of what this framework will look like…
The Investment Case
Vertu Motors is a leading automotive retailer with 155 outlets across the UK. The company’s share price has climbed over 60% since the start of 2021, but could still have further to run after upping guidance for this year on the back of strong demand and supply shortages in the industry.
It seems that the market is still trying to work out how to value automotive retailers on the back of these excess levels of profitability, and herein is where the opportunity may lie. After upgrading guidance for the second time in two months in August, Vertu Motors expects to generate profits before tax in the region of £50 to £55 million. Now, it remains to be seen how long this level of earnings will last, but this is remarkably cheap when you take into account the current market capitalisation of less than £200 million, and the strength of the balance sheet.
The strength of the balance sheet is what really differentiates Vertu Motors from its peers. The company holds £182m worth of tangible net assets, worth the equivalent of 50.2p per share.
Vertu Motors’ financial position gives it a unique advantage. It may decide to pursue acquisitions to make the most of current market opportunities, but the balance sheet strength equally provides investors with a notable margin of safety in the event that market conditions suddenly change.
Profile
What are the company's principal business activities, how does it generate its revenues?
As an automotive retailer, Vertu Motors’ principal business activities involve the sale of new and used vehicles, such as cars, vans, motorcycles and fleet vehicles. This accounts for the majority of revenue generation for the company, but the after sales services it offers, including parts, accessories and repairs accounts for a notable 43% of total gross profits.
Source: Vertu Motors Investor Presentation 10th August 2021 (PI World)
Size, Sector & Exchange
Vertu Motors is an automotive retailer operating under the Consumer Cyclicals sector. The shares currently change hands at 52.6p, valuing the company at £199m. The stock is listed on the UK’s Alternative Investment Market (AIM).
Business strategy
Whilst Vertu Motors remains focused on improving the profit contribution from the plethora of acquisitions the company has made over the last few years. It intends to continue on its proven strategy of acquisitions and consolidation in the UK motor retail industry by acquiring profitable peers or turnaround opportunities.
Furthermore, as the motor retailer with the largest number of franchise partnerships in the UK, Vertu Motors will continue to carefully review its portfolio, so that it may act on future opportunities in this space, or to make changes to maximise returns on investment.
History & Growth
Founded in late 2006, Vertu Motors was created to acquire and consolidate UK motor retail businesses. The company has grown significantly through its strategy, and now operates through 3 main brands: Bristol Street Motors, Vertu, and Macklin Motors. Its franchise dealerships range from Honda, Land Rover and Jaguar, to Volkswagen, Audi and Mercedes-Benz.
A brief overview of Vertu Motors’ recent transactions can be seen by the screenshot below, and via the link here.
Source: Vertu Motors
Recent News
Most recent trading update
Trading Update - 20th August 2021
The most recent trading update was to provide upgraded earnings guidance ‘driven by the exceptional UK used car market conditions’. As a result, Vertu Motors expects profits before tax to be in the region of £50m to £55m, up from £40m to £45m.
Vertu Motors wrapped up the update with the following comments: ‘As a result of the strong performance seen in the financial year to date, the Board intends to re-establish the payment of dividends to shareholders upon finalisation of the interim results. The Board remains very confident in the prospects for the Group, which is strategically well placed to capitalise on the changes and opportunities in the UK motor retail sector.’
Share Buyback Programme - 20th August 2021
On the same day the company announced an earnings surprise, it also announced that it would commence share buybacks, to the tune of £3m, between now and the end of February 2022. The board commented the following in the announcement: ‘The share price of the Company for some time has traded at a discount to the tangible net asset value and in the opinion of the Board below the intrinsic value of the business. As the Company has a low level of debt and is considerably cash generative, the Board considers it appropriate to allocate some capital to buy back shares.’
Catalysts
Trends & Events
Vertu Motors seems to be making the most of the current market conditions. Demand for new and used vehicles remains strong, and there is a fundamental supply shortage of new vehicles coming online, due to a global semiconductor shortage and shortage of labour. July car production figures in the UK reached their lowest levels since 1956. This has boosted margins for the company, particularly in the used car market.
On the back of two earnings upgrades by the company (yes, there was another upgrade in July, see here), Vertu Motors might start to capture the attention of more brokers. Updated estimates should start coming in from the brokers and subsequently generate more interest in the security. Investors should also watch out for the H1 results on the 13th October. The company will provide a detailed update on current operations and some further guidance on outlook.
Risks
What risks does the business face?
Market - A downturn in the economy could have a profound impact on new and used vehicle purchases. Furthermore, the supply shortages being seen in car production could start having a notable impact on volumes if not resolved soon.
Competitive - Vertu Motors is not the largest of automotive retailers, and doesn’t maintain a major online presence, or have the same marketing budgets as some of its competitors.
Acquisition - The company’s management has proven its ability to acquire businesses and integrate these effectively over time, but acquisitions in this environment may prove costly.
Summary
Bull points
Valuation - Vertu Motors is attractively priced based on whichever value metrics are assessed. Whilst this may be a period of abnormal earnings for the industry, Vertu Motors keeps on upgrading its guidance, which doesn’t seem to be fully priced in.
Balance Sheet - The company possesses a very strong balance sheet, especially when compared to its competitors. This gives the company an excellent platform for growth, whilst also enabling it to comfortably carry out share-buybacks and reinstate a dividend in H2 2022.
Industry tailwinds - Automotive retailers are currently close to, or already at, the height of the current cycle. The demand and supply side dynamics are structured so favourably that record earnings are being seen across the industry. How long this will last remains to be seen, but if demand stays buoyant and the supply of new cars contrainsted, automotive retailers could be set for a sustained period of exceptional levels of profitability.
Bear points
On-going supply constraints - The global shortage of semiconductors is really taking its toll on car production. Major manufacturers like Toyota, General Motors and Ford are significantly cutting production as a result. If not resolved soon, this could have a significant impact on the cars delivered to Vertu Motors by its manufacturing partners, and its overall new vehicle sales.
Low margin industry - This is typically a low margin industry, as can be seen by the historically low Returns on Capital Employed, Returns on Equity and Operating Margins on the StockReport page.
Peak cycle - Consumer cyclicals tend to look their best when they are producing record profits, upgrading guidance and returning capital to shareholders. The issue is that these are often at, or near to, the peak of the cycle and the risk vs reward is not as favourable as it once was.
If you would like to read a more in-depth analysis of Vertu Motors, Paul Scott & Roland Head have written some excellent pieces in the last few months, which you can see here and here. The most recent investor presentation by PIWORLD also provides a useful starting point for further research, which you can watch here.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
12 comments
The prodigious Interim profitability achieved the 6 months to 31 August increased the Tangible book value by over 20%. The Vertu Motors (LON:VTU) shares now trade in line with tangible assets, discounting a gloomy outlook for future profitability:
"Net tangible assets per share of 61.5p (28 February 2021: 50.2p) reflecting strong asset base, Net cash position and cashflow generation."
Lovely read, such a difficult spot to value right now. Short term it really could either way, we know bumper profits are due but with lack of second hand cars available and semi conductor issues this could really hamper supply and hence sales could decline. Ultimately all car retailers will likely revery to low margin businesses so long term I'm not a fan.
I hold but note in the long run car ownership is predicted to fall dramatically.More and more people will phone for Uber or a selfdrive car to pick them up.With new cars at the moment there are real logistic problems with getting parts.This is good news for the second hand car market
I think that it would depend on where you live, because being in a small rural town, in large rural area we are still awaiting Channel 4, let alone decent broadband or mobile signal with more than 1 bar reception (whilst standing on the upstairs toilet, leaning out the window).
So there is going to be a divide here between Cities and large towns and then rural areas.
Having spent time working with things like planning for automated vehicles within cities, so main depot out of town for servicing and overnighting, versus in town sites to recharge batteries, clean up that coffee spill, cope with peak/off peak and surge demand (e.g. heavy rain). Thinking about repurposing multi-story car parks to do this for example.
So yes the future will be very different from now, but there is going to be a long journey to get there.
There is going to be a large generational difference to those who grew up with passing your driving test being a passage in life. To my nephew just did a crash driving course to get his license and buy a car because he changed job and needs a car and to drive to do the job, someone who never planned to drive having grown up and lived in cities his whole life.
There is also to consider the luxury factor, no different from now, the ability to show I can have, rather than I need. Do you need the Tesla S, or a Nissan Leaf? Do you need a personalized number plate? Again another wealth divide.
So there is going to be a need for car dealerships. It is going to be dependent on those who can change and adapt to an uncertain future, so that ability to flex to selling, reselling and servicing electric vehicles and all that.
Tommy
I hold £VTU. On the positive side they do have a good online sales process albeit not the marketing budget of the 'disruptors'. They did point out that pure online sales were only a trivial percentage of their sales, but didn't put that down as a limitation of their online solution but rather down to the preferred behaviour of car buyers.
On the downside I think it is still necessary to consider the risk that the selling of cars under leasing arrangements might be classed as mis-selling at some stage in the future. It's a general industry practice but would affect Vertu Motors (LON:VTU) too.
as a retired motor dealer all i can say is dont fall in love with vetu in 2007 lookers was the best run co pendragon was taking on the world 2008 came along and kicked into space.
Excellent review Jack. I can only see the current situation a win/win for Vertu Motors (I hold) - Whilst the demand for new cars is low the demand/price of second hand cars increases, as new cars come on stream the demand for new cars will increase which I assume will have higher margins due the constrains on production. (more demand than supply) although at the same time the market for second and cars will also decrease - The key question IMO is the timeframe required for the market supply and demand of both new and used cars to reach some form of equilibrium. IMO again this is going to take some time, shortages of chips, covid uncertainity, employee return to work uncertainity all make it appear that the current situation in the car maket will remain like this for some time to come.
Kind Regards.
excellent Keelan. Many thanks for this new initiative which has considerable merit . Have been a shareholder of Vertu for many years and will continue to be so. Your stock brief explains quite clearly why it is such a fine well managed company .
Great initiative Keelan. I’ve taken the liberty of adding this to the Stock discussion thread index. Will add other future write ups in due course.
Gus.
gus 1065 - I also took the liberty of bringing your stock discussion thread to the attention of the Stocko team via the green tab!
Single company extended commentary is a great addition to the community approach and the the daily SCVR - it both deepens and widens discussion (since any Mkt cap can be done) .
Let's hope more people like your thread.
Hi Gus,
Thank you for this! The new discussion threads helped guide us in starting this initiative. We do have a great community here at Stockopedia, which is always a great source of inspiration!
Kind regards,
Keelan
Great initiative, thanks Keenan. Perfect coffee break quick read to get you thinking.