Vertu Motors “long-term valuation is compelling” says Zeus Capital


Vertu Motors plc (LON:VTU) has announced an acquisition that gives it a significant BMW and Mini presence in Yorkshire and the North East. We see this as an asset rich transaction with minimal goodwill, albeit it will take time to turn this business around financially. That said, we believe this transaction comes at an exciting time, given the brands strong pipeline of electric vehicles, and this also shows Vertu investing for the long term as a key industry consolidator.

  • Acquisition: Vertu has acquired a significant BMW and Mini market area in Yorkshire and the North East from Inchcape. This consists of 12 sales outlets, in five locations namely York, Sunderland, Teesside, Durham and Malton. In addition, there is a BMW Motorrad motorcycle operation in Sunderland and an additional used car operation in York.
  • Financing: The total consideration amounts to £18.7m (subject to a completion accounts finalisation) together with the assumption of manufacturer used vehicle stocking finance of £8.9m. The assets acquired in respect of freehold/long leasehold properties amount to £16m The acquisition has been funded with a combination of cash and a £12.8m 20-year mortgage facility from BMW Financial Services at a fixed interest rate of 2.9% for the first 5 years, another sign of strong OEM support for this transaction. The acquisition includes a payment in respect of goodwill of £0.75m, which highlights the value of this asset rich transaction and appears to be substantially less than transactions undertaken in recent years.
  • Impact on forecasts: Due to the timing of the purchase and the historic trading performance of the sites acquired, we anticipate this transaction will reduce 2021E adjusted PBT by £3.0m and will also be earnings dilutive in 2022E, generating a positive impact on profit in 2023E. We ultimately believe the business acquired is capable of delivering annual EBITDA of £5.8m and even on a conservative EV of £35m assuming additional stock investment, equates to 6x.
  • Trading update: The Group’s strong trading momentum continued into November. While this is good news, we believe it remains sensible to exercise some caution for the remaining quarter of FY21 given the clear uncertainties still ahead (Brexit, COVID cases rising post relaxation of rules, rising unemployment etc). Indeed, it is worth noting that new car registrations were -27% during November according to the SMMT, albeit this showed a considerable improvement vs. April and May showing how well the industry has adapted to national lockdowns. We believe the impact of stronger trading offsets the anticipated dilution from this transaction.
  • Investment view: We believe the long-term valuation of Vertu Motors is compelling and have not modelled in the full potential of this transaction into our long-term forecasts. We see a conservative average valuation of 65p per share, which implies significant upside from the current share price.
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