Zeus Capital today note an unscheduled trading update from Marshall Motor Holdings Plc (LON:MMH) noting the recent share price declines with the shares now below its IPO price. That said, board remains confident in the full year outlook and confirmed it continues to trade in line with expectations to FY 2016. The sector has been hit hard in recent weeks driven by weaker sterling and concerns over the UK consumer in the next 12-18 months with strong growth factored primarily due to the Ridgeway acquisition. The valuation looks low at a 5.5x FY16E P/E multiple falling to 4.6x in FY17E which is below the UK dealer average of 7x While we have concerns over the balance sheet and the level of leverage employed in the business at this point in the cycle, we believe the current share price has heavily discounted this level of risk. The shares are now looking more appealing (along with the rest of the sector) for longer term investors in our view.
Management confident on full year outlook: In an unscheduled trading update following “recent movement in the share price”, the group highlights it enjoyed material growth in both revenue and profit driven by the acquisitions of SG Smith and Ridgeway. This is consistent with our forecasts as we project 57% EPS growth in 2016. The Group has confirmed strong trading in the important plate-change month of September with “significant” like-for-like new unit sales growth, outperforming the wider UK market as reported by the SMMT. Sales volumes in used cars during September have also shown like-for-like growth. Aftersales revenues have also continued to show strong like-for-like growth.
Share price decline: The shares are down 25% YTD which is 35% below the post-Ridgeway peak of 213p. Despite delivering on its strategic objectives since IPO, making some key acquisitions, the price is now 15% below the IPO price. While we have some concerns over the level of leverage employed in the business (this is running at 2x including leasing debt and depreciation), the progress made in integrating the Ridgeway acquisition to date appears to be going to plan. However, investors are clearly looking out to 2017/18 and the impact of sterling as well as lower household spending as higher inflation takes hold. While we believe there is scope for earnings pressure in 2017 across the sector, we believe the sector on the whole will weather this much better than 2008 driven by better systems/processes, shorter buying cycles, a larger UK parc driving more aftersales opportunities as well as OEMs effectively financing residual values to name but a few.
Valuation: Marshall Motor Holdings Plc shares have fallen back from a post Ridgeway peak of 213p following the impact of Brexit, with the shares trading at a discount to NAV and a clear P/E and EV/EBITDA discount to the sector. As with all of the stocks in the sector, we think it has been oversold. The company trades on an adjusted EV/EBITDA of 4.4x for FY16E, falling to 3.6x in FY17E. On a P/E basis the company trades at 5.5x FY16E earnings in FY16E falling to 4.6x in FY17E.