Vertu Motors Plc (LON:VTU) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: This morning, we saw the announcement from Vertu Motors around the acquisition of Hughes Group Holdings for £21.8 million. Mike, what are your thoughts on the acquisition?
A1: So, they’ve acquired a very well established business, Hughes Group Limited has represented Mercedes for over 40 years, in its portfolio they’ve got Mercedes outlets in Beaconsfield and Aylesbury and that’s actually adjacent to what they’ve already got in Reading, Ascot and Slough. In addition, there’s a Mercedes commercial van franchise and they also operate outlets for Skoda, Jeep and Peugeot and with that, comes a vehicle preparation centre as well. The operational management team will be maintained in the group as well, so they’ve certainly acquired a well established group with good synergy potential with the rest of the group.
Q2: Can you talk us through the financial aspects of the acquisition?
A2: They will pay an estimated cash consideration of £21.8 million, that’ll be financed out of cash resources within the group, this is a deferred consideration of £1.5 million on top of this as well and there’s also used cost stocking loans of £3.5 million which Vertu will take on too. That’s asseted in Hughes’ £12 million and within that £12 million freehold properties stand at £6.2 million as well.
Last year, to December 2015, Hughes delivered an EBITDA of £2.8 million and a PBT of £2.1 million and we think, without assuming any near-term group wide synergies, this business should be able to deliver anything between £3.5-£4 million EBITDA on a mature normalised basis. I also think there’s an opportunity to reduce working capital by around £2.5 million on this as well.
So, if we work that through, I think Vertu has paid about 6 times EBITDA for this business and we think that’s a good price given the quality of the assets, the operations and the potential synergies.
Q3: Has this changed your forecast in any way?
A3: Yes, so for 2019 we expect this to be modestly dilutive, remember there’s no March included for Vertu on that basis so a small dilutive impact. For the first full year of ownership in 2020, we think this will lift EPS by about 6% and then anticipated further 8% in 2021 and again, I think we’ve taken a slightly conservative approach to any potential synergy gains.
Q4: What are your overall thoughts in terms of an investment?
A4: We continue to believe that long term valuation is compelling at this juncture, to February 2020, Vertu Motors trading on a PE of 8 times and an EV/EBITDA of below 5 times. You’ve got a normalised free cash free yield to date 9% and a dividend yield of about 3% as well so they are very committed to driving shareholder value and have already acquired just short of 5% of the issued share capital and they’ve got authorisation to go to around 10%.
So, we think they are making progress, delivering shareholder value on a number of different ways.