Vertu Motors Plc Trading in line

Zeus Capital

Vertu Motors Plc (LON:VTU) has released a robust trading update, essentially confirming it continues to trade in line with expectations. We are maintaining our cautious forecast assumptions for now as we anticipate the backdrop particularly in new cars to get tougher from March. That said, the continued progress in aftersales and used cars remains extremely encouraging. We believe the near term valuation with a 2018E P/E of 7.8x and an EV/EBITDA of 5.1x more than reflects this any future trading risks, and remains at an unwarranted discount to its peers despite having the most conservative balance sheet.

* Pre-close trading update: Vertu has confirmed it is trading in line with expectations, as it experienced continued growth in volumes, revenue and profits across the board. Acquisitions undertaken in the prior and previous years are performing to plan, with management controlling operating expenses at 9.7% of revenue, which is flat YOY despite a number of pressures we identified in our sector note in November. The balance sheet remains very strong, backed with a strong freehold property portfolio (£188m at H1 2016), a used car inventory largely unencumbered and very low levels of debt. A new facility of £40m has been announced vs. the previous facility of £30m which is currently uncommitted, providing significant firepower for future growth.

* Key performance drivers: Aftersales continued to see strong growth with LFL service revenue running at +6.0% and LFL gross profits +6.9% representing the seventh year of similar growth. New retail volumes grew +1.5% for the 5 months ended 31 January, and -9.3% on a LFL basis. Gross margins did strengthen from 7.9% to 8.0% and LFL gross profit per unit +6.5% to £1,324 accordingly. Fleet returned to growth and was +6.1% on a LFL basis, which was ahead of the market at +4.1% (SMMT). The growth in this channel accelerated due to the softening levels of private new car demand we saw during H2 2016. The UK light commercial van market fell by -1.4% during the period following several years of growth, with Vertu LFL running at -10.7% albeit some of this was due to product mix. Used cars was once again very strong with LFL volumes +7.8% and gross margins also 20bps ahead of last year highlighting the strength of the market and the continued gains.

* Forecasts: We are maintaining our headline forecasts on the back of this statement. A strong March is anticipated in the new car market ahead of changes in Vehicle Excise Duty (VED). Our assumptions are more conservative than the SMMT who are anticipating a 5% drop in new car registrations for 2017.

Investment view: While conditions in the new car market may well get more difficult from here, we believe Vertu Motors Plc has put in solid foundations with the current share price largely asset backed and nothing factored in for long term growth.

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