Vertu Motors plc (LON:VTU) has released an unscheduled trading update, delivering another earnings upgrade to 2022E, this time in excess of 30%. This is driven by the strength of the used car market, although we believe Vertu is outperforming particularly in terms of securing supply. We believe the shares remain significantly undervalued, and that it remains well placed in the sector.
- Trading update: Vertu has released a further trading update, which leads to another earnings upgrade to the full year outlook. This follows a 15.5% EPS upgrade to 2022E EPS at last month’s AGM. Adjusted PBT for H1 2022E is not expected to be less than £40m, with revised guidance for the full year now at £40-45m vs. £28-32m previously. Confidence in the future prospects of the Group remain very high, which reflects our view that Vertu is very well positioned to capitalise on the changes and opportunities in the UK motor retail sector.
- Key drivers: The key driver behind this ongoing level of outperformance is the used car market, which remains exceptional. This is particularly the case in terms of margin retention, which is having a material impact on Group profitability and cashflow. As we have flagged in our recent sector review, vehicle supply remains very tight which is aiding high residual values. Despite the supply constrained environment, Vertu has been able to maintain inventory and sales volumes at higher levels than previously anticipated, which should aid its ongoing market outperformance. Elsewhere, new vehicle volumes and margins have remained strong, while service revenues have strengthened due to the timing impact of annual services and MOTs delayed by the lockdown in the prior year.
- Caution for H2: While it’s clear that Vertu Motors is performing well and ahead of a robust market at present, there are some reasons to be cautious going into H2. A theme that has been widely discussed has been new vehicle supply, which is expected to intensify and potentially disrupt the key September new car market. In addition, this is likely to have a knock-on effect on used vehicle supply. Any further disruptions from COVID-19 also cannot be ruled out in terms of future restrictions and employee absence. There are also UK-wide labour shortages, and high vacancy rates are putting upward pressure on costs which also have to be managed going forward.
- Forecast changes: Exhibit 1 summarises our forecast changes, which shows a 2022E EPS upgrade in excess of 30%. For 2023/24E we have also nudged up our assumptions, although mindful of supply constraints and cost inflation.
- Valuation: This remains undemanding on 2023E EPS estimates, tangible net assets per share of 50.2p and our value per share in excess of 80.7p.