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

- Link: https://www.directorstalkinterviews.com/interview-motor-retail-sector-update-smmt-data-mike-allen/412737609
- Published: 2017-10-06T07:10:35+01:00
- Author: Giles Arbor

**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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