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Zeus Capital

Vertu Motors PLC Zeus Capital anticipate a robust set of H1 results

Zeus Capital today announced that they anticipate a robust set of H1 results from Vertu Motors Plc (LON:VTU) on 12th October. While trading conditions may well get more difficult in 2017, we do think the Group is well positioned and has one of the strongest balance sheets in the sector. The shares look oversold on this basis and it continues to trade at a sector discount.

H1 results: We anticipate a robust set of H1 results from Vertu on 12th October and are forecasting revenues +19% YOY, static gross margins of 10.6% with operating margins also static at 1.4% assuming no overhead recovery. Our underlying EBIT forecast of £19.9m compares to £17.5m delivered last year. We have assumed an increase in interest of £0.4m YOY due to increased activity levels, and as a consequence are targeting an adjusted PBT of £19.0m vs. £17.0m last year. If delivered this would equate to 1% underlying EPS growth (3.9p vs. 3.9p last year) due to the impact of the placing during the period. We are forecasting an interim dividend of 0.5p, which is +10% and anticipate a strong net cash balance albeit with most of the placing proceeds invested.

Key themes: The last trading update was on 1 September indicating that both its used and aftersales divisions continued to perform well as key drivers of the overall business. It will be interesting hear about September trading in the new car market, with management indicating that the order book was progressing well, albeit we would point out that used and aftersales generate higher margins. In the last update, management highlighted both record low interest rates and record levels of employment in the UK as key macro drivers of the company’s healthy trading patterns. Weaker sterling relative to the Euro and the Japanese Yen may dictate OEM behavior going into 2017.

Forecasts: We maintained our FY forecasts in September, and continue to believe there is scope for operational improvements to drive incremental returns as the company integrates recent acquisitions. We accept that trading conditions may soften going into 2017, although we think it is too early to quantify any impact before we understand OEM targets. We note the SMMT have recently marginally reduced its forecasts for 2017 by 6% albeit this remains above 2.5m, which remains a strong market in a historical context. Elsewhere, we would anticipate further growth in aftersales given recent activity in the new car market over the last five years. The used car market also remains robust looking at recent data from CAP HPI and Glasses Guide.

Investment view: We believe the Vertu Motors Plc share price declines have been overdone, with the shares -31% over 12 months underperforming vs. the UK dealers -20%. The Group has a strong, cash rich and conservative balance sheet (used car stocking loans are shown as debt rather than creditors) with forecast net assets per share in excess of 60p. On earnings metrics it continues to trade on depressed multiples on 7.7x 2017 and an EV/EBITDA of 4.6x. The sites are well invested with a 3-year average forecast FCF yield of 6% backed with a dividend yield of 3% with cover running in excess of 4x. We believe the shares have been oversold and remain well positioned.