Q1: Marshall Motor, they have provided an unscheduled trading update this week in which the numbers were quite positive. Has this had an impact on your forecast in any way Mike?
A1: Yes, so as you say is was a non-scheduled trading update, clearly, they’d seen better trading conditions particularly in October in their used car performance and also in aftersales. That does provide some good momentum going into next year which we believe might be difficult. Based on their comments that they expect their performance to be slightly better than this year on a continuing adjusted PBT basis, we increased our numbers from £22.3 million to £25.5 million against £25.4 million last year.
However, on the back of that, given the uncertain conditions at the moment largely due to Brexit but also supply issues that we’re seeing at the moment, we’ve elected not to change our 2019 and 2020 numbers at this stage.
Q2: The markets seems to be reacting favourably to the news so in terms of valuation and company outlook, how do you see Marshall Motor Holdings going into 2019 and beyond?
A2: I think given what they’ve produced in a difficult quarter and the fact they’ve been able to maintain their strong used car margins into the second half, I think they’re well positioned to go into a difficult and uncertain market.
In terms of the valuation of the shares, clearly, they were very cheap before this announcement but even now the valuation still looks very undemanding to us. So, the shares at the moment are trading on a PE to December ’18 of 6.4 times and we’ve not changed our ’19 number so the PE is ’19 is about 7.5 times which is still below the sector. On EV/EBITDA basis, this company is still trading on an EV/EBITDA of around 3 times which we think is very cheap as well, particularly with what they’ve done with the balance sheet and we expect very little debt from this company in the year end. Based on our conservative forecasts, we assume that cash will start to build from next year as well. I think, clearly, the dividend yield is approaching 5% and quite attractive as well.
I think the other point we’d probably make is given the huge amounts of capex, all companies in this sector have been investing over the last couple of years, that capex cycle will start to ease, and we anticipate Marshall’s generating about £10 million of free cash flow a year from next year which again we think looks very attractive from a valuation perspective.
The final point I’d probably make is clearly in the context of the current market cap of the business as of the half-year stage when they announced results in August. This company’s got £121 million of freehold long-leasehold assets and £27 million of other retail assets, so about £148 million of property assets on its balance sheet which clearly underpins the current market cap of the business as well.