The country's roads are awash with shiny new vehicles and driving this automotive spending spree is, perhaps surprisingly, mainland Europe. With demand for new cars weak on the continent, car manufacturers, faced with over supply, are showering UK consumers with cheap financing deals, as Britain's economy is healthier. The concomitant effect has been that stocks in this retail sub-sector have performed extremely well this year, and given the cyclical nature of the industry and rising consumer confidence, it appears 2014 will be a good year, too. It's not surprising then, that the sector has seen a significant re-rating. But one company, Cambria Automobiles (CAMB) has fallen under the radar - until now.
- Healthy UK new car market
- Consolidation strategy
- Strong balance sheet
- Cheap rating
- Market dependent on financing from manufacturers
- Consumer confidence risk
That's partly because Cambria's so much smaller and younger than its peers - it only floated on the Alternative Investment Market in 2010. But having just reported a bumper set of full-year results and with a clear growth strategy, an unusually strong balance sheet and superior returns on capital to top it all off, the cheaper rating has attracted attention from City analysts and the shares seem to be gearing up for acceleration.
In an industry that's still highly fragmented, there's a lot of potential for Cambria's growth-through-acquisition strategy. Formed in 2006 and built up from scratch, Cambria typically buys up distressed businesses and quickly turns them around. Its track record here is strong. Take 2007 when Cambria acquired Summit Auto Group, which made a £6.9m pre-tax loss in the previous year. Following the acquisition, the business made a profit contribution of £800,000 after just eight months of trading.
There have been nine successful acquisitions since Cambria's inception, so it now represents 17 brands through 27 dealerships. An impressive set of results covering the year to August further demonstrates the strength of its strategy. New vehicles sales leapt 16.1 per cent by volume, resulting in a 32 per cent rise in adjusted pre-tax profit to £4.1m - and this was despite some of its assets still being in turnaround mode. Now, a strategic shift in favour of acquiring higher-quality dealerships that are immediately earnings enhancing means Cambria's growth should accelerate further. "The way I describe it is we are coming to end of toddlerhood and growing into adolescence," says chief executive Mark Lavery.
| CAMBRIA AUTOMOBILES (CAMB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 47p | MARKET VALUE: | £47m | |
| TOUCH: | 46-48p | 12-MONTH HIGH/LOW: | 51p | 17p |
| FWD DIVIDEND YIELD | 1.3% | FWD PE RATIO: | 13 | |
| NET ASSET VALUE: | 25p | NET CASH: | £2.9m | |
| Year to 31 Aug | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 373 | 4.90 | 3.63 | 0.30 |
| 2012 | 353 | 3.10 | 2.70 | 0.30 |
| 2013 | 396 | 4.10 | 3.60 | 0.50 |
| 2014* | 413 | 4.40 | 3.40 | 0.50 |
| 2015* | 424 | 4.70 | 3.70 | 0.60 |
| % change | +3 | +7 | +9 | +20 |
Normal market size:10,000 Market makers: 7, Beta:0.1, *N+1 Singer estimates, underlying PTP and EPS figures | ||||
Underpinning Cambria's success is a strict adherence to stringent operating parameters. This means purchasing asset-backed businesses with no, or very little, goodwill, and without legacy assets such as burdensome pension schemes. As a result, the balance sheet is unusually robust with just £356,000 of intangibles out of £24.6m of net assets, plus a net cash pile of £2.9m. Analysts at N+1 Singer believe by using the funds at its disposal, Cambria could boost sales by about 70 per cent. Additionally, Cambria's pre-tax return on capital employed is 20 per cent - double that of the peer group average. This explains why Singer's analysts describe the rating as "anomalous" - Cambria trades on a calendar year 2014 PE ratio of 12.8 - a 10 per cent discount to the peer group. On an enterprise value-to-sales basis, the discount rises to 53 per cent.
The caveat here is that Cambria's growth could be curtailed by an improvement in Europe's car market, and there are indeed signs that it's troughing. Still, a sustained recovery will take some time to materialise and the UK market is still 15 per cent off previous peaks. Declining consumer confidence is another risk factor, but economic data is positive and points towards an uptick in consumer spending - at least in the near term.
