Marshall Motor Holdings PLC Leasing disposal and portfolio update

Marshall Motor Holdings Plc

Marshall Motor Holdings PLC (LON:MMH) forecasts have been updated by Zeus Capital to reflect the disposal of Marshall Leasing (MLL) and the closure of six loss making sites (5 franchised dealerships and 1 used car centre). We downgrade our adj. PBT forecasts for 2018E and 2019E by 15.1% and 15.4% respectively. We see the disposal and the portfolio update as positive for Marshall Motor Holdings (MMH), allowing the group to strengthen the balance sheet by reducing financial leverage and focus the business model at a time of uncertainty across the sector.

Leasing disposal: MMH agreed to sell MLL to Bank of Ireland, which has now been approved by the FCA for a gross cash consideration of £42.5m (11.5x 2016 earnings). The net cash proceeds of the disposal will initially be used to reduce existing levels of indebtedness and settle a c.£1.0m pension liability. The group has incurred c.£1.7m of exceptional costs relating to transactions costs and management incentives, as a result of the transaction and will realise a significant gain on disposal during the period.

Portfolio update: MMH announced on the 21 November the closure of five franchised dealerships and one used car centre. In the year ending 31 December 2017, these dealerships are expected to make a combined revenue contribution of approximately £40m and a pre­tax loss of approximately £1.3m. Closure costs are expected to be approximately £6m which includes £2m of non­cash items including asset and goodwill impairments. The cash closure costs will be partly offset by the disposal of a surplus freehold property (Nissan Boston) and the realisation of working capital / disposal of stock held in the dealerships.

Forecasts: We updated our forecast assumptions following our sector review, in which we made more conservative assumptions given the deteriorating market backdrop across the sector. We did not adjust for the disposal of the leasing business or the changes to the portfolio and so update our forecasts, which are below consensus, to reflect these two new developments. Our 2017E assumptions are unchanged, given the timing of the transaction and minimal impact on the full year outturn. We cut our 2018E adj. PBT forecast by 15.1% and now expect £22.5m in 2018E with £23.1m in 2019E down 15.4% from previous forecasts.

Investment view: If the disposal had been completed on 30 June 2017, Marshall Motor Holdings PLC would have had pro forma net assets at that date of approximately £196.7m (equivalent to 254p per share) and pro forma net cash of approximately £4.6m. The shares are trading at a 36% discount to NAV and a clear P/E and EV/EBITDA discount to the sector (24.0% and 28.0% in FY1 respectively), and is supported by our valuation methodology which implies a value of 236.3p per share. Given the improved strength of the balance sheet and more focused business model there is potential for the discount vs the peer group to close.

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