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Zeus Capital

INTERVIEW: Motor Retail Sector Update – SMMT data – Mike Allen

September SMMT data: private registrations -9.3% YOY and -3.9% YTD

The SMMT (Society of Motor Manufacturers and Traders) has released data this morning confirming new car registrations in September of 426,710 which is -9.3% YOY, which is a worse performance than we had anticipated, and is the first time there has been a decline in September in six years. Private registrations were -8.8%, with fleet also showing a decline at -10.1% YOY representing 47.0% of registrations vs. 47.5% last year. Notably there was a 21% decline in diesel registrations as uncertainty over government clean air policies have discouraged consumers and businesses from buying new diesel vehicles. We believe supply issues are now starting to impact performance, particularly for volume dealers who remain more exposed to currency movements than premium brands (Ford and Vauxhall -19% and -26% respectively). Clearly, trading conditions have deteriorated further based on this data, and we believe there is potential for some downside earnings risk particularly in 2018E. We continue to favor stocks with flexible balance sheets at this stage of the cycle, and believe stocks such as Vertu and Cambria remain significantly underpinned by their growing property portfolios and proven operating models.

SMMT data: New car registration data for September has been released, which was -9.3% YOY at the headline level. This is the first time registrations have declined in September since 2011 (-0.8%). Government plans to improve air quality and confusion over the impact of these plans on diesel vehicles appears to have impacted consumer and business demand for new diesel vehicles. Mike Hawes, SMMT chief executive commented, “September is always a barometer of the health of the UK new car market so this decline will cause considerable concern. Business and political uncertainty is reducing buyer confidence, with consumers and businesses more likely to delay big ticket purchases. The confusion surrounding air quality plans has not helped, but consumers should be reassured that all the new diesel and petrol models on the market will not face any bans or additional charges”.

Mix issues: Within the mix, private registrations were -8.8% in September with fleet -10.1% and business -5.2%. The weakness in private registrations points to increased uncertainty from the consumer and a potential sustained deterioration in consumer demand in our view; as well as supply issues now coming through as a result of the weakened currency. The pattern of prestige brands outperforming volume brands continued in the period although registrations were down across almost all the major brands with key performances including Audi (-4.8%), BMW (-3.47%). We believe the weaker sterling is now beginning to impact supply for volume brands which has contributed to the significantly weaker performance for brands such as Ford (-19.12%) and Vauxhall (-25.5%) vs premium. In our view, the 10.1% decline in fleet supports the view that the supply issues are now starting to impact performance. We note the strong performance from Volkswagen (+7.7%) which we believe is evidence of their efforts to recapture market share in the UK following the diesel issues it had around this time last year. The impact of uncertainty created by new Government clean air initiatives is evident in the data with a continued consumer shift away from diesel vehicles and into alternatively fueled vehicles, with a 21.7% decline in diesel as petrol declined 1.2% and AFV grew by 41.0%.

Outlook: It is clear that Q3 trends in the new car market have deteriorated further following a difficult Q2. From a demand side perspective, we remain cautious with consumer confidence softening in recent months against a backdrop of increasing political and economic uncertainty. We are also conscious that sterling remains weak, and note the recent strength in European new registrations (August ACEA data was +5.6% YOY and is currently +4.5% YTD).

Forecasts and valuation: While we envisage further downside earnings risk despite consistently having below consensus estimates post Brexit, we believe the sector valuation had priced in a lot of this risk but will be reviewing our trading assumptions for 2018E and 2019E. Balance sheet strength across the sector is generally robust, and we are likely to see further consolidation activity as smaller operators become more distressed in our view.

Catalysts: We anticipate H1 results from Vertu on 27 October, and anticipate a trading update from Motorpoint towards the end of the week. We also anticipate Q3 IMS statements from Lookers and Inchcape towards the end of the October.

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