That’s because even if all the 1.2m Volkswagen cars in the UK fitted with software that provides false emission test results subsequently fail current EU testing standards, and there is no suggestion at all that the actual figure is anywhere near to this, then the German automotive giant will have no choice but to recall the cars at its own expense for modification. This will provide a boon for car dealers representing Volkswagen Group, of which Vertu is one as the company owns dealerships representing all four of the German giant’s core brands: Volkswagen, Audi, Seat, and Skoda. Indeed, this is exactly what the board noted in their trading update alongside half year results which beat expectations and led to a raft of earnings upgrades.
Importantly, Vertu has not seen any significant decline in total vehicle sales in the four Volkswagen brands, which may surprise those who predicted a fall off in sales in light of the scandal. In fact, this is more than just rhetoric as Vertu went one step further and acquired SHG Holdings, a Volkswagen and Audi dealership based in Hereford, in a £12.8m deal a fortnight ago. The purchase price equates to little over 6 times SHG’s cash profits of £2m last year, and 8.5 times its pre-tax profits, and will be earnings accretive in the first year. On a pro-forma basis, the four Volkswagen brands now account for 9 per cent of Vertu’s annual revenue, up from 6 per cent, albeit this is still well below the 20 per cent market share of Volkswagen in the UK.
Key takes in results release
The acquisition also highlights why the company continues to do so well. Not only is the market back drop favourable – September marked the 43rd consecutive month of growth in new car registrations buoyant – but Vertu has been making some astute acquisitions to make better use of its bumper cash pile and strong cash generation. It has also been turning around acquired businesses by extracting better investment returns and capitalising on synergy benefits with its other franchises.
And the board have the funds to continue with this strategy given the robust cash generation of its operations. This was a key take for me in yesterday’s results as, despite investing £8.8m in acquisitions and £7.6m in capital expenditure in the six months to end August 2015, Vertu reported a surge in operating cashflow from £15.9m to £37.9m. True, £17m of the increase was down to a positive movement in working capital, but operating cashflow was still well ahead of underlying operating profits, thus highlighting a high cash conversion rate. It’s worth noting too that pre-tax profits surged by 28 per cent to £17m. This explains why net cash more than doubled to £32.1m since the February 2015 fiscal year-end, a sum worth almost 9.5p a share, or 14 per cent of the company’s share price.
The other key take for me was the lower inventory of used cars which points towards stringent working capital management, and the growth in aftersales where the gross margin earned is a thumping 44 per cent. Following a 14 per cent rise in interim gross profits to £50.7m, the aftersales segment accounted for 39 per cent of Vertu’s half year profits but less than 8 per cent of revenues. Growing share of high margin aftersales in the sales mix is a sensible strategy to adopt given that the boom in new car sales over the past few years has resulted in a rapid expansion of the used vehicle parc, the segment of the market that requires higher levels of maintenance spend.
Priced for a re-rating
With analyst EPS estimates for the fiscal year to end February 2016 being upgraded by 4 per cent to 5.7p, implying full-year pre-tax profits will rise by 15 per cent to £25.3m, and with the dividend per share set to rise from 1.05p to 1.3p, I feel Vertu’s shares provide very decent value on a forward PE ratio of 10 (net of cash on the balance sheet) and offering a forward dividend yield of almost 2 per cent. That’s an anomalous rating for a company that has already booked two thirds of its forecast annual profits in these first half results alone.
So having initiated coverage on the shares when the price was 66p (‘Poised for a strong rally’, 6 September 2015), I maintain my fair value estimate of 80p to 85p, a level at which the rating would be a reasonable 12 times EPS estimates of 6.3p for the fiscal year to the end of February 2017 after stripping out the company’s cash pile. That’s a much fairer valuation to me and one that’s also underpinned by property and cash on the balance sheet currently worth almost 80 per cent of the market capitalisation of £231m. Trading on a bid-offer spread of 67.5p to 68p, I rate the asset-backed and lowly rated shares a buy on a modest 1.2 times book value. Buy.
Please note that I have written two columns today and nine in total this week, all of which are included in the list of my articles below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
