Mike Allen, Head of Research at Zeus Capital joins DirectorsTalk to discuss his latest note on the UK Motor Retail Sector. Mike talks us through findings on both new and used car market performance and other drivers that are impacting the market.
Half time report
In this note and following the SMMT June data released yesterday, we look at the key dynamics of the sector during H1 2019 and how this is likely to impact the rest of the calendar year. The dealers have challenges on several different fronts, which could lead to some earnings pressure. However, we do believe valuations have reached a trough point, balance sheets remain strong, and FCF should start to steadily build as the capex cycle for most dealers has come to an end.
SMMT data: New car registration data for June was -4.9% YOY at the headline level. Registrations in the first half of the year were 1.27m units and -3.4% YOY, which was in line with SMMT expectations. Registrations have declined for the fourth month in a row. We believe the underlying market was actually declining at a faster rate than that suggested by this data and believe pre-registration activity during the last week of the month was relatively high with the underlying market declining by -10-15%.
Mix issues: Within the mix, private registrations were -4.8% in June with fleet down 1.0% and business -39.9%. Within the business segment, we wonder whether there has been any category change by OEMs from business into retail, albeit this is hard to verify. The weakness in private registrations points to increased uncertainty from the consumer and a potential sustained deterioration in consumer demand in our view. Notable brand performances include Audi (-2.19%), BMW (-13.1%), Vauxhall (-14.7%), Mercedes-Benz (+0.1%), Volkswagen (-11.8%) and Ford (-1.3%).
Outlook: It is clear that trends in the first half of the year in the new car market have continued to deteriorate following a difficult 2018. From a demand side perspective, we remain cautious. Consumer confidence has deteriorated post March in our view as a result of increasing political and economic uncertainty caused by the extended Brexit process and lack of clarity on the issue. Other challenges include tough trading for OEMs, increasing regulatory scrutiny post Lookers in an industry poised for significant change for the coming decade.
Valuation: While the industry no doubt faces some near-term challenges, we believe current valuation multiples reflect this and are close to trough levels. Balance sheets are strong and FCF should start to build as the capex cycle draws to a close for most dealers. Looking longer term, we do believe there is a clear future for mid/large well-capitalised dealer groups and believe there is strong value on offer for long-term investors.