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Marshall Motor Holdings Plc

Marshall Motor Holdings Trading update & EPS upgrade

We note the unscheduled trading update released this morning by Marshall Motor Holdings (LON:MMH), confirming better than expected trading in the used car market. Together with continued growth in the aftersales business and strong operational initiatives this is driving growth in underlying PBT vs 2017A. As a result, the company now expects adj. PBT in 2018E to be ahead of 2017 (continuing basis). We update our forecasts accordingly to reflect this, which triggers a 14% upgrade to our previously below consensus estimates. We leave forecasts for 2019E and 2020E unchanged reflecting the current uncertainty heading into next year and remain cautious at this juncture as we await further clarity over Brexit. The valuation on our cautious assumptions from 2019E continue to look compelling to us, particularly in the context of its balance sheet, dividend yield and strong anticipated FCF.

Trading update: MMH has this morning confirmed that trading patterns over October were leading to a better than anticipated outturn for FY 2018. The key reasons behind this was growth in used volumes being ahead, backed with strong margins, paired with further revenue growth in the aftersales business against weak YOY comparatives during H2 to date. The company now expects adj. PBT to be ahead of last year on a continuing basis. In line with our industry thesis, WLTP and the resultant supply pressure continues to impact the group’s new car business, albeit the supply shortage created in the used market as a result has provided a positive environment for used car margins.

Impact on forecasts: We upgrade our 2018E adj. PBT to reflect a stronger used car margin performance driven by higher residual values and higher volumes. We now expect adj. PBT in 2018E of £25.5m (vs £22.3m previously). We leave 2019E and 2020E unchanged reflecting our longer-term industry thesis and the risks inherent in the ongoing Brexit negotiations, general political uncertainty in the UK, uncertain outlook for OEM behaviour and ongoing industry wide cost pressures. Based on our trading assumptions for 2018E we now expect net debt at year end of £3.5m (from £5.9m) going to £1.3m net cash in 2019E (net debt of £1.1m).

Valuation: Based on our updated forecasts, the group is trading on a P/E of 5.9x in 2018E and an EV/EBITDA of 2.9x. The group has >£100m of freehold and long leasehold assets on the balance sheet providing strong asset backing. This is supported by progressive dividend yield in approaching 5%, and we also anticipate FCF generation of c£10m per annum from 2019 following significant capital expenditure undertaken in recent years, which also looks attractive to us in the context of the current share price. While Marshall Motor Holdings is not immune to current industry pressures, it does have a solid track record of industry and M&A outperformance particularly in used cars, which is reassuring going into 2019 and beyond.