Vertu Motors Acquisition and portfolio changes

Zeus Capital

We note the announcement this morning from Vertu Motors (LON:VTU) confirming the acquisition of four Volkswagen Passenger car dealerships in West Yorkshire. We also note an update on a number of portfolio changes as management continue to focus on optimal capital allocation. The group has paid a total consideration of £9m, with minimal goodwill of £1.35m. We are leaving our trading assumptions unchanged at this juncture as we anticipate a comprehensive pre closed trading update during the beginning of March, but due to timing anticipate modest dilution to Feb 2020 EPS, albeit expect this transaction to be EPS enhancing during the first full year of ownership (Feb 2021 and beyond). We do however update our net debt forecast to reflect the cash consideration of £9m. We believe the Group is well positioned long term given its strong balance sheet, rising FCF generation (FCF yield in 2021E of 9.9% rising to 11.4% in 2022E) and strong track record of disciplined growth.

  • Acquisition: Vertu has announced this morning the acquisition of the trade and assets of four Volkswagen Passenger car dealerships in West Yorkshire from Goodman Retail Limited, a trading subsidiary of Sytner Group Limited Total consideration is expected to be approximately £9m paid in cash and will be financed from existing resources. The Board expects the acquisition to be earnings enhancing in the first full year of ownership. The purchase of these businesses in Leeds, Huddersfield, Harrogate and Skipton represents further expansion of the Group’s Vertu Volkswagen brand in good demographic areas and complements the Group’s existing 13 outlets in Yorkshire comprising the Nissan, Renault, Jaguar, Land Rover, Vauxhall and Honda brands. After the acquisition, the Group will operate a total of 9 Volkswagen passenger car dealerships. Total estimated consideration of £9m includes a payment of only £1.35m in respect of goodwill.  For the year ended 31 December 2018 the combined management accounts of the dealerships acquired showed that they achieved revenues of £112m and a profit before tax of £0.6m.
  • Portfolio changes: The Group exited the Volvo franchise in Derby with the business being transferred to a subsidiary of Marshall Motor Holdings plc, but retained the premises, which have been refurbished with a new franchise operation due to commence in the next few months. The Group has also opened two new franchise outlets for Hyundai in the North East of England, one at the groups existing site in North Tyneside (formerly a Infiniti dealership) and another has been added to the group’s existing Ford dealership in Northumberland.This brings the number of Hyundai outlets operated by the Group to 10, making Vertu Motors one of Hyundai’s largest UK partners.
  • Forecasts: We leave our headline earnings forecasts unchanged but adjust net debt for the consideration and will look to update our forecasts at the time of the pre-close update.
  • Investment view: We believe the long-term valuation remains compelling at a 2020E P/E of 6.7x falling to 6.2x in 2021E and an EV/EBITDA of 3.6x falling to 3.2x with a dividend yield of c4% backed up by our average implied intrinsic value per share of in excess of 70p and net tangible assets per share of 44.9p
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