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Vertu Motors PLC Solid foundations in place say Zeus Capital

Vertu Motors PLC (LON:VTU) has reported another record performance for H1 2017 with adjusted EPS +4% ahead of our expectations. We are maintaining our FY forecasts despite softer new car sales, as we have confidence in its aftersales and used car business accounting for 72% of gross profit. The shares and indeed the sector look oversold to us, and while there could be modest earnings downside in 2017, we believe more significant EPS risk has been factored in.

H1 results: Vertu has again delivered record results for the 6 months ended 31 August, beating our expectations at the adjusted-EPS level by 4%. Revenues were 1% below our forecast albeit +18% YOY with acquisitions in the period accounting for £67.3m of the growth (5% of total). Adjusted EBIT was bang in line with our forecast and was +18% YOY with margins flat YOY at 1.4%. Interest costs were £0.5m lower than our forecast but £0.7m ahead YOY reflecting new vehicle stocking charges due to more premium sales outlets and higher new car stock levels during the period. Cash conversion (operating cash flow as a % of operating profit) was 133% vs. 222% last year. The dividend was in line and +11% YOY and is currently yielding 3% at current levels.

Key performance drivers: The performance in used cars was particularly pleasing, with aftersales also showing solid progress. Acquisitions made in 2017 made an early positive contribution, which is unusual given timing (lack of March trading) and reflects the quality of the premium businesses acquired. The acquisitions made in 2016 made a solid contribution, which again validates the success of the strategy in our view. New cars were modestly down YOY albeit this reflects a falling trend in private new car registrations since April 2016.

Forecasts: We are maintaining our headline forecasts on the back of these results and management’s near term guidance. The implied H2 PBT of £12.0m compares to £10.4m delivered last year, with a strong September performance already delivered. We are also encouraged by the ongoing strength of the servicing business, where we anticipate further progress during the coming months as the UK car parc continues to expand.

Investment view: Looking at various valuation techniques comprising measures through the cycle, we arrive at a value of 79p, which implies significant upside from current levels (71%). We assume a black cloud scenario of 6x 2017E EPS (37p per share), albeit this would be at a discount to the current freehold/long leasehold valuation of 43p per share (60p on a net assets basis). While conditions in the new car market may well get more difficult from here, we believe Vertu has put in solid foundations that will allow it to prosper through the cycle.

Commenting on the results, Robert Forrester, Vertu Motors PLC Chief Executive, said: “In the first six months of trading, our proven growth strategy has delivered a record set of results with increased revenues, gross margins and profits. We have continued to successfully grow the business, through both organic growth and the acquisition and integration of premium franchises, as we seek to build a balanced portfolio. Consistent delivery of an outstanding customer experience continues to be a strong driver of the growth of dealership performances across the Group. This is demonstrated by the growing number of customers retained into the Group’s aftersales businesses.

“The outlook for the remainder of the year remains positive, underpinned by low interest rates and record high levels of employment in the UK economy. The Group’s trading performance in the key September plate change month was strong. The Board anticipates that the Group’s full year results will be in line with market expectations.”