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Marshall Motor Holdings Plc

Marshall Motor Holdings PLC Comfortably in line with expectations

Marshall Motor Holdings PLC (LON:MMH) Group Chief Executive Daksh Gupta and Chief Financial Officer Mark Raban talk to DirectorsTalk about its trading update. Mark talks about the main drivers behind the good results and news flow for the coming months while Daksh talks about acquisitions and brexit.

Zeus Capital said about today’s trading update:

Marshall Motor Holdings Plc (LON:MMH) has confirmed it is trading comfortably in line with expectations for FY 2016 with the integration of Ridgeway, cost control and net debt levels all going to plan. The outlook for 2017 and beyond is less certain and is consistent with our industry view, albeit we reduced our EPS by 13-16% to account for this in November. While we had concerns over the balance sheet and level of leverage at this point in the cycle, we believe the current share price has heavily discounted this level of risk with the stock on 5x prospective earnings with the current market capitalisation underpinned by property assets.

Pre-close statement: MMH has issued a pre-closed trading update this morning, which confirms that it will trade “comfortably” in line with expectations to December 2016. Costs are running to plan with good control in place, with exceptional costs relating primarily to the Ridgeway acquisition (ZC £4.0m) in line with expectations. The net debt is also said to be in line with management expectations, and we have assumed a total position of £119.6m, which includes leasing debt and is running at 2x EBITDA (including leasing depreciation) or 1.25x excluding leasing debt, which is asset backed and not used for covenant purposes. The Group has over £100m of freehold/long leasehold property, with the integration of the Ridgeway acquisition said to be going to plan.

Key performance drivers: The Retail business saw increased LFL revenues during H2 vs. H1 albeit margins did come under pressure, which is a trend we have seen emerge in some quarters across the sector. New car LFL was ahead of the +3.2% delivered in H1 during H2, which shows good outperformance vs. the market. LFL sales in used cars remained robust and marginally ahead YOY. The strong LFL performance seen in aftersales revenues and margins also continued throughout 2016, which is a positive development. Within the Leasing business, this performed in line with expectations. The fleet continued to show growth with 2.7% underlying growth. Within this, the used car market also remained supportive with good levels of disposal profitability.

Trading outlook: The tone of the outlook statement has become more cautious, and concurs with our industry view anticipating a decline in new car sales during 2017. That said, management remain confident that it remains well positioned to generate growth due to their recent acquisitions. As part of our sector update in November, we cut our 2017E and 2018E EPS estimates by 13% and 16% respectively reflecting our caution in the year ahead. We are maintaining these assumptions.

Investment view: The shares have fallen nearly 40% from its post Ridgeway peak and are close to trough levels at present. While we did have some concerns over the level of total debt in the business and it has less balance sheet flexibility vs. some of its peers, we do think these fears have been overdone and the valuation based on cautious forecast assumptions looks compelling. It’s also important to note that the business has significant asset backing, which covers the current market capitalisation of the company. The shares trade at a >25% P/E discount to the UK dealers on 5x vs. a discounted sector multiple of 7x, which looks oversold on both counts.

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