# INTERVIEW: UK Motor Retail Sector Half time report

- Link: https://www.directorstalkinterviews.com/interview-uk-motor-retail-sector-half-time-report/412787039
- Published: 2019-07-05T08:22:07+01:00
- Author: Giles Arbor

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.

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