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Vertu Motors Plc

Vertu Motors Compelling foundations

Vertu Motors (LON:VTU) has delivered a respectable set of FY2019A results, which are 7.3% ahead of our forecasts at the adjusted PBT level. We tweak our headline forecasts at this juncture, to reflect higher levels of revenue, with growth in gross profits despite margin pressure coming through in new and used and continued cost pressure across the business, albeit we expect these are beginning to stabilise. We also note the significant cash beat in 2019A and our net debt forecasts for 2020E and 2021E are lower as a result, with a cash pile building in 2021E. We believe the asset backing in this Group remains compelling (NAV per share 44.9p) and it remains well positioned to deliver strong levels of shareholder value across a number of different fronts.

Final results: Vertu has delivered a robust set of results in an uncertain market, which were behind last year but ahead of our forecasts. New vehicle sales and fleet & commercial vehicle sales both saw declines in profitability as volumes fell, which is consistent with the wider market. Both used and aftersales saw growth in profitability YoY, offset by increased operating expenses as cost pressures persisted through the period. Revenues were up 6.7% YoY and 5.1% on a LFL basis. Revenue growth was driven largely by used cars and aftersales growing both departments contribution to the revenue mix and supporting gross margins. Gross profits increased by 2.7% YOY on a LFL basis with margins at 10.8% vs 11.0% last year. Adjusted EBIT was 10.4% ahead of our forecast and down 10.0% YoY as a result of increased operating expenses as cost pressures persisted, albeit operating expenses as a percentage of revenue remained constant YoY at 9.9%. Despite higher interest costs vs. our forecasts, adjusted PBT came in at £23.7m due to the strong cost control, vs. our forecast of £22.1m. Full year dividends are proposed at 1.6p per share, an increase on the prior year compared to our forecast that they would be held at 1.5p.

Forecasts: We update our forecasts to reflect higher levels of revenue, with gross margins static and continued cost pressure assumed across the business and higher financing costs assumed. We now expect adj. PBT of £25.7m in 2020E (vs £26.3m previously) going to £27.6m in 2021E (vs 28.0m previously). We also introduce our 2022E forecasts for the first time, assuming a c.£1.0m uplift from 2021E levels implying adj. PBT of £28.5m, with marginal increases in EPS as a result of factoring in the share buyback to date. Based on our revised earnings assumptions net debt for 2020E is £4.0m going to £4.1m of net cash in 2021E.

Investment view: We believe the long-term valuation remains compelling, Vertu is trading on a 2020E P/E of 6.4x falling to 6.0x in 2021E and an EV/EBITDA of 3.5x falling to 3.1x with a dividend yield of c.5%, backed up by our average implied intrinsic value per share of 77.4p. The group trades at a discount to peers on an adjusted basis, excluding used car stocking loans from net debt. Management remain committed to driving shareholder value and we note it has acquired £1.0m of the £2.0m allotted share capital investment to date, with £3m now set aside in the updated programme

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