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Motoring ahead

Motoring ahead
January 12, 2016
Motoring ahead

The re-ratings are mainly down to the fact that both companies are firmly in earnings upgrade cycles, helped in no small part by a benign sector backdrop and the benefit of earnings enhancing acquisitions. Indeed, I outlined the positive impact on profits of Vertu Motors, the sixth-largest car dealer in the UK, when it made an earnings accretive acquisition last month of Aceparts, a well-established non-franchised online vehicle parts business (www.aceparts.com) headquartered in Sittingbourne, Kent ('In the fast lane', 2 December 2015).

Shortly after I initiated coverage on the shares at 66p ('Poised for a strong rally', 6 Sep 2015), analysts at brokerage Liberum Capital raised their EPS estimates for the 12 months to the end of February 2016 from 5.9p to 6p based on Vertu's full-year pre-tax profit increasing by 19 per cent to £26.2m, rising to EPS of 6.7p on pre-tax profit of £29.4m for the following financial year. The dividend is forecast to be hiked from 1.05p to 1.3p a share in the current financial year (February 2016 year-end), rising to 1.6p the year after. So with upgrades likely, I still reckon that Vertu's shares offer value, so much so that I have tweaked my target price range to 85p to 90p. Trading on 11.3 times forecast earnings pre-upgrades, and offering a 2.1 per cent prospective dividend yield, I continue to rate Vertu Motors' shares a buy on a bid-offer spread of 75.5p to 76p.

 

On the acquisition trail

Cambria has been on the acquisition trail too, the upside of which has helped drive the shares to a record high of 87p, up over 50 per cent in the six months since I initiated coverage at 57.5p ('Drive a re-rating', 13 Jul 2015). I last updated the investment case at 73p ('Running small cap winners', 25 November 2015), when I reiterated my positive stance in light of an upbeat trading outlook and a bumper set of 2015 financial results (August year-end). At the time I noted that Cambria's shrewd management team not only have an enviable track record of buying underperforming dealerships and turning them round, but they are equally adept at buying premium dealerships which offer a sound strategic fit. I expected more deals to follow because a key take in the full-year results was Cambria's eye-catching cash conversion.

We didn't have long to wait as the company's board have just acquired the Landrover franchise in Welwyn Garden City, Hertfordshire, located a few miles from its Jaguar and Aston Martin franchises in the town, from Jardine Motors Group in a £10.8m deal. The business made bumper operating margins of 5 per cent on revenues of £54m in the 12 months to end December 2015, so don't expect Cambria's management to enhance those margins much more. But they don't need to because the franchise already earns £2.5m of pre-tax profit so even after factoring in interest on a bank loan to buy the business, the acquisition will be significantly earnings enhancing.

Cambria has also sold off its Grange Jaguar franchise in Exeter and closed its Aston Martin boutique on the site, moves that reflect Jaguar Landrover's strategy that both its brands should be represented by the same dealer in a given franchise territory. Following completion of the two transactions, Cambria will operate a total of 29 dealerships, representing 44 franchises and 17 brands in the UK, which are now expected to generate revenues of £590m and pre-tax profits of £9.9m in the financial year to end August 2016, up from £524m and £7.7m a year earlier. On this basis, analyst Mike Allen at brokerage Zeus Capital upgraded his current year EPS estimates by 13 per cent and now expects full-year EPS to rise by 30 per cent from 6p to 7.8p in the 12-month period. This means that Cambria shares are rated on 11 times earnings estimates or a two point discount to the retail sector average. That valuation is anomalous in my view given that the company is producing growth and return on capital employed well above the sector average. For good measure, Zeus also forecast a 12 per cent hike in the payout to 0.9p a share.

Double digit EPS growth in 2017 too

Moreover, with the full benefits of the acquisition set to be seen in the next financial year (August 2017 year-end), Zeus have lifted their EPS estimates by 22 per cent to 8.6p and also expect a further hike in the dividend to 1p. In other words this is a company that is set to deliver double digit increases in earnings and dividends over the next two financial years, and with the benefit of a lowly geared balance sheet - both Matthew McEachran at brokerage N+1 Singer and Mr Allen of Zeus predict Cambria will have modest year-end net debt of between £7.2m and £7.4m - then there is scope for the company to use its heavily asset backed balance sheet (property worth 41p a share), and robust cash generation, to continue to make earnings accretive bolt-on acquisitions.

So although the shares are closing in on my 90p target price, there should be more fuel left in the tank to drive this upgrade cycle further. Indeed, Matthew McEachran at broking house N+1 Singer raised his fair value estimate from 86p to 95p post news of yesterday's acquisition, and Mike Allen at Zeus Capital has a new 130p medium-term target.

Needless to say, on a bid-offer spread of 85p to 87p, valuing Cambria's equity at £87m, and offering 10 per cent potential upside to my new target price of 95p, I rate Cambria shares a buy.

Please note that I published 10 columns on 23 companies since the start of last week all of which are listed below and also on my IC homepage....

 

MORE FROM SIMON THOMPSON...

I have written articles on the following companies this week:

Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)

Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)

Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)

Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)

GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)

LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)

Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)

32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 January 2016)

Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 January 2016)

Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 January 2016)

■ 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