In this article I'm going to discuss the value attributed by Vertu Motors (LON:VTU) and Marshall Motor Holdings (LON:MMH) to their franchise agreements. I'll focus on VTU because they reported today:


But first, why consider holding these shares?

The bull case clear rests on the strong tangible asset backing, strong operational (and disposal) cashflows, low valuation and opportunity for a snap-back when current issues with diesel supply and exchange rates resolve themselves.

Indeed the snap-back in pricing pressure on cars imported from the Eurozone should already be happening: GBP vs EUR has risen very strongly in the last week, likely after today's outlook comments from VTU was written. Today it is higher than at any point during VTU's H1 reporting period (let alone September) bar 10 days in April.

It is for the above reasons that I hold both Vertu Motors (LON:VTU) and Marshall Motor Holdings (LON:MMH) and modestly added to my holding of Vertu Motors (LON:VTU) this morning.

For the rest of this article I'm going to focus on the negatives and a particular concern many have over the sustainability of their business model. I'm going to drive this from an accounting perspective about the value of their franchise agreements.

As I see it, balance sheets are a minefield. Tangible assets such as property are generally held at book value until sold and therefore can be significantly undervalued. Debtors (and profits) can be manufactured by selling to the uncreditworthy. Goodwill can be manufactured by overpaying for acquisitions. Intangible assets such as goodwill, data and intellectual property never appear on a balance sheet except when converted to goodwill as part of an acquisition. Decisions on whether to capitalise investments are taken before the value / lifetime of those investments can possibly be known and some investments e.g. in advertising cannot be capitalised. Most assets are written down (depreciated or amortised) on an arbitrary basis that bears little or no resemblance to reality (e.g. on a straight line rather than proportional basis and over an arbitrary time period).

For these reasons, where there is any…

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