Vertu has va-va-voom

Vertu Motors may be the new kid on the block among motor retailers - it began life as a cash shell just three years ago without a dealership to its name. But it now has 60 showrooms turning over £800m a year and, with management keen to pursue expansion plans, the well-funded business is unlikely to remain the UK's ninth largest auto dealer for long.

That's because, even after spending £18.5m on acquisitions last year, Vertu has £24m net cash after raising £30m through a share placing in June plus a significant debt facility. It has few qualms about spending either - when we spoke to its bosses earlier this month, chief executive Robert Forrester said that, if he could find the right dealerships, he would "spend as much as Michael [Sherwin, the group's finance director] will let me."

Investors shouldn't be too worried that Vertu will overstretch itself, though. Mr Forrester is a veteran of the motor trade, having spent five years running Reg Vardy, where he oversaw the expansion of the business from 65 to 100 outlets before selling to Pendragon in 2006. Mr Sherwin has a strong plc pedigree, too, and has been keeping a close eye on costs and working capital, which meant the group generated £15.8m of operating cashflow last year.

What's more, Vertu will be expanding into a market that's slowly getting to its feet after the battering it took in the credit crunch. The government's car-scrappage scheme did much to stabilise the market and improved availability of finance has kept the momentum going since the scheme ended. An 11.5 per cent rise in new car registrations in April - the 10th successive monthly increase - saw the Society of Motor Manufacturers and Traders up its 2010 sales forecast by 5.9 per cent to 1.92m vehicles. That said, like-for-like sales growth will look weaker towards the end of this year against last year's scrappage-skewed figures.

In some respects, the downturn has even benefited Vertu. Much capacity has been permanently removed from the market - there are 220 empty dealerships across the UK - pushing more volume through surviving outlets at improved profit margins. It also means good quality assets have come up for sale at attractive prices. The acquisition of Bristol Street Group for £40m shortly after flotation formed the foundation of the business, and it has recently been able to cherry pick dealerships out of administration. Its bosses also point out that last year's acquisitions were bought after the busy March trading period so didn't deliver their full profit potential.

As well as providing a solid trading base, the spree means Vertu has built up an impressive portfolio of freehold and long-leasehold properties worth £66m, or 37p a share - the same as the share price. Vertu also has a track record of improving the profitability of acquired businesses, imposing its own processes and driving more fleet sales and higher-margin servicing activity, which now account for over 40 per cent of gross profits. Fleet demand is returning after a tough 2009, good news for Vertu as the segment accounts for approaching a third of its sales.

Management also hopes that the euro will continue to weaken against sterling as many of the cars it sells are made in Europe. Apart from boosting margins, that also gives Vertu scope to run sales promotions. That could help offset the imminent rise in the rate of VAT, which, otherwise, could push up car prices significantly.