Vertu Motors: Capital allocation specialists

Vertu Motors

Vertu Motors plc (LON:VTU) has delivered another earnings upgrade driven by strong ongoing used car margins, in what is effectively an early delivery of the H1 pre-close update. Dividend payments will resume, and a share buyback programme has also recommenced. The shares look too cheap to us even on 2023/24 EPS backed with a current forecast yield of 3.6% and trading below net tangible assets per share of 50.2p. We believe this update should be taken well with Vertu very well positioned to capitalise on the inevitable changes in the industry with a well-executed capital allocation strategy to boot.

  • Trading update: Vertu Motors has confirmed that it continues to trade ahead of forecast expectations. The key driver remains used car margins as prices remain high with no sign of abating in the near term. In the new car market,  September LFL order intake is running ahead of prior year levels. However, due to well documented supply issues that have been previously flagged, vehicle deliveries could be delayed into future periods, which remains highly uncertain. This could have a knock-on effect into used vehicle supply as well if this persists, albeit it is too early to assess. Cost pressures have also been flagged once again with Vertu being impacted by labour shortages, high vacancy rates and upward pressure on employment costs as we have seen across many industries of late. An H1 dividend will be reinstated.
  • Increasing guidance again: The board is now guiding adjusted PBT to be in the range of £50-55m vs. previous guidance of £40-45m. The key driver behind this has been used car margins, and it’s anticipated that Vertu will announce an adjusted PBT of £50m for H1. Clearly the assumptions in H2 remain very modest, albeit uncertainty levels remain high as outlined. The risks of COVID-19 have also not been removed, with the Group still seeing some impact from staff absence, with potential future restrictions possible as we move into the autumn/winter.
  • Impact on forecasts: On the back of this latest statement, we are increasing our 2022E PBT forecasts by 35.8% which drives an equivalent upgrade to EPS. As we see no sign of used car prices/margins abating from current levels, our forecast assumptions are at the top end of management guidance. We are not changing our forecasts in future years after 2022E given current levels of uncertainty but will review these in detail when Vertu announces H1 results in October.
  • Share buyback resuming: A share buyback programme has resumed with Vertu Motors investing up to £3m until 28 February 2022. This has been a consistent part of its capital allocation strategy for some time. We believe this is sensible given the Group trades below its net tangible assets per share of 50.2p and below our assessment of intrinsic value in excess of 80p. We will adjust our forecasts to reflect this buyback once complete at year end.
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