UK Motor retail sector – Zeus Capital

Vertu Motors Plc

June SMMT data: private registrations -7.8% YOY and -4.8% YTD

The SMMT (Society of Motor Manufacturers and Traders) has released data this morning confirming new car registrations in June of 243,454 which is -4.8% YOY, implying a H1 of 1,401,811 units which is -1.3% YOY but represents the second highest H1 on record. Private registrations were -7.8%, with fleet also showing a decline at -2.4% YOY representing 57.1% of registrations vs. 55.6% last year. We continue to believe the earnings risk has been accounted for in heavily discounted valuation multiples based on cautious and below consensus forecast assumptions across our coverage universe.  We continue to favor stocks with flexible balance sheets at this stage of the cycle, and believe stocks such as Vertu Motors Plc (LON:VTU) and Cambria Automobiles (LON:CAMB) remain significantly underpinned by their growing property portfolios and proven operating models.

SMMT data: New car registration data for June has been released, which was -4.8% YOY at the headline level. H1 registrations were the second highest on record at 1,401,811 units but the trading environment has continued to decline as previously flagged. The SMMT anticipate a stabilization of the new car market with trading at a similar level of demand through the rest of the year. Mike Hawes, SMMT chief executive commented, “Demand for new cars has started to cool following five consecutive years of solid growth but the numbers are still strong and the first half of the year is the second biggest on record. Provided consumer and business confidence holds, we expect demand to remain at a similarly high level over the coming months”.

Mix issues: Within the mix, private registrations were -7.8% in June with fleet -2.4% and business -8.3%. 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 for the month included Ford (-10.4%), Fiat (-21.4%), Volkswagen (+17.9%) and Peugeot (-12.4%) Clearly some of this performance related to product cycle, albeit there was a pattern of prestige brands outperforming volume again. We also note the continued consumer shift away from diesel vehicles with a 14.7% decline in diesel as petrol and AFV grew by 2.5% and 29.0% respectively.

Outlook: It is clear that Q2 trends in the new car market have deteriorated following a record Q1 this year. From a demand side perspective, we remain cautious with consumer confidence softening in recent months against a backdrop of increasing political and economic uncertainty. We are also conscious that sterling remains weak, and note the recent strength in European new registrations (May ACEA data was +8% YOY and is currently +5% YTD). We note continued comments in the media on new car finance particularly following Mark Carney’s comments about consumer credit. We point out that this is lower risk than most forms of consumer credit given it is secured on the vehicle, and believe the value of write offs remain extremely low and stable. In the used car market, while we anticipate modest volume growth, we are monitoring diesel residual values closely at present.

Valuation: On what we consider to be cautious and below consensus estimates across the piece, we continue to believe the sector valuation is attractive for the UK dealers and close to trough levels. Balance sheet strength across the sector is generally robust, and we are likely to see further consolidation activity as smaller operators become more distressed in our view. It would also not surprise us to see further overseas interest in the UK sector given current valuations especially if sterling does weaken further from here. We note the recent acquisition of Beadles Group by US firm Group 1 Automotive, as they continue to consolidate in the UK, which reflects the attractive valuation of the sector in the US and increasing competition amongst plc operators for acquisitions.

Catalysts: We anticipate solid H1 performance for most dealer groups given the record Q1 performance, albeit we would not be surprised to see margin pressure intensify as we progress through the year. We believe the trading patterns in used cars and aftersales remains robust, and it is worth pointing out that motor dealers typically generate c60% of PBT during H1, which should provide a solid foundation for FY 2017. We note the recent statement from MMH which points to a record H1 with softer trading conditions expected in H2.  While we anticipate near term trading news flow to deteriorate from here, we do believe the long-term risk/reward profile of the sector remains positive and is priced in.

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