Vertu Motors Plc Positioned to take advantage – Zeus Capital

Vertu Motors Plc

Vertu Motors Plc (LON:VTU) has delivered a robust set of FY2018A results, which are 3% ahead of our forecasts at the adjusted EPS level. We maintain our headline forecasts at this juncture, following good levels of outperformance in March and April this year despite a tough market backdrop. We believe the asset backing in this Group remains compelling 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 a tough market, which were behind last year but ahead of the forecasts we reset in January this year. Adjusted EPS was +3.4% ahead of our forecasts due to a slightly lower effective tax rate of 18.9% vs. 20% assumed in our forecasts and was -11.5% YOY. The dividend was bang in line with our forecast and +7% YOY. The net cash position of £19.3m compared to our forecast of £2.2m and compares to the £21.0m position last year despite a working capital outflow(£13.3m), £24.6m investment in capital expenditure (albeit offset by £15.8m of disposals) as well as its share buyback investment of £5.5m during the period.

Key performance drivers: Given the difficult trading backdrop, the performance in new and used vehicles was down YOY, albeit this was offset by management action in closing sites as well as the impact of acquisitions from 2017A. Fleet & Commercial was also ahead of last year, while its aftersales business continues to perform well. Lower interest costs also made a positive contribution. Taking action in closing sites had an impact on profitability, with ongoing investment required in acquired dealerships while cost pressures relating to property, payroll and vehicle cleaning remain.

Forecasts: We are maintaining our headline assumptions following management guidance in the outlook statement. However, the only change we do make is on net cash given the 2018A outperformance and updated schedule of capital expenditure investment, with the end of high capex requirements now in sight.

Investment view: We believe the long-term valuation remains compelling, with Vertu Motors Plc trading on a 2019 P/E of 10.0x and an EV/EBITDA of 5.3x falling to 8.5x and 4.5x in 2020E. Management remain committed to driving near term shareholder value with further share buybacks on the agenda. The dividend policy remains progressive in nature despite the tough trading period, with a close focus on capital allocation key. Given the strong balance sheet, value accretive M&A opportunities could also emerge. FCF generation should also steadily increase in 2020E and 2021E, assuming normalised levels of working capital and capex, implying a current yield of 7.2% and 7.3% which also makes the shares look good value in our view.

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