Vertu evolves to meet structural changes

Vertu (VTU) confirmed that its adjusted pre-tax profits for the year to 28 February were 7 per cent ahead of analysts’ forecasts at £24.6m. That represents a creditable outcome, even given that profit assumptions would have been tempered somewhat by events. And it is guiding in the range of £24-28m for the current financial year.

With trading performance inhibited by two national lockdowns and the resultant closure of sales showrooms, it is hard to imagine a more dire set of circumstances, but the industry may have already become accustomed to the ground shifting beneath its feet.

Dealers had already been forced to contend with supply issues brought about by the Worldwide Harmonised Light Vehicles Test Procedure, with volumes also threatened by the ripple effects of the diesel scandal – a classic example of how flawed government policymaking gives way to egregious industry practice. (By some legal estimates, up to 9.6m drivers could be in line for an average £12,000 in compensation).

To make matters worse, revenue streams linked to retail financing were imperilled due to the intervention of the Financial Conduct Authority. The regulator has put the kibosh on the discretionary commission finance model, which enabled some dealers – with the apparent collusion of lenders – to set their own interest rates and, by extension, the commissions they could pocket. The aggregate cost to car buyers has been estimated at £300m a year.

And if all that wasn’t enough, the global semiconductor shortage has hit the production of cars and vans, as several automakers have had to temporarily close factories.

The automotive sector, as with any industry, has been evolving to meet changing consumer preferences, in addition to regulatory reforms. Certainly, the increased prevalence of ‘personal contract purchases’, usually known as PCPs, fed into increased trading volumes in the lead-up to the challenges outlined above.

And more punters seem willing to eschew the “full service” offering, even though the bulk of buyers in the UK still prefer the personalised touch – one of the findings within the 2021 Deloitte Global Automotive Consumer Study.

At any rate, we are certainly witnessing a swing towards click-and-collect and home delivery options, a point underlined by Vertu’s chief executive Robert Forrester, who has credited the “use of omni-channel retailing functionality” as one of the primary reasons why the group performed as well as it did through FY2021.

Vertu has added 18 sales outlets to its portfolio since the start of March 2020, which seems totally at odds with the events that played out through the year, particularly given that the industry sales function is gradually changing. The hackneyed image of a beaming salesman dressed in a loud checked blazer may become a thing of the past. Bespoke marketing and sales models are becoming commonplace, as a flexible, consumer-focused model is probably more in keeping with an age in which many buyers view the purchase of an automobile as a kind of service offering. It seems logical to suggest that a gradual move in favour of the omni-channel will reduce the reliance on traditional forecourt sales, presumably reducing lease liabilities and boosting net cash-flows.

And the industry is evolving in other ways. Vertu has already achieved NFDA Electric Vehicle Approved Status (EVA) at three of its sites and expects more to follow this year – this is an accreditation endorsed by the government’s Office for Low Emission Vehicles (OLEV) and the Energy Saving Trust (EST). It behoves dealers to familiarise themselves with whatever vehicles they are selling into the market, particularly given the scale of the transition underway. But the eventual centrality of what Deloitte describes as “mega trends” relating to “connectivity, autonomous, shared mobility and electric”, could signal problems in after-sales volumes.

Deloitte estimates that the market in maintenance and service parts could contract by 84 per cent by 2035, while demand for over-the-counter parts could shrink by 24 per cent. This not only has negative implications for original equipment manufacturers (OEMs), but also for dealerships which derive a sizeable proportion of their revenues from upgrades, servicing and repairs. Happily, however, the same analysis indicates that franchised dealer networks are not disproportionately exposed in this area.

It may seem churlish to suggest that Vertu hasn’t totally optimised its performance through a troubling FY21, but the group did see like-for-like new fleet car sales fall by almost a third, a problem also highlighted in Cambria Automobiles’ (CAMB) recent interim results.

It is still too early to gauge the degree to which sales will bounce back this year. Nor is it clear whether the ill-effects of Covid-19 have served to mask the growing structural challenges facing the industry. So, although the Society of Motor Manufacturers and Traders (SMMT) recently upgraded its sales estimate for the year citing an improved economic outlook, it is still down a fifth on the 2010-2019 average. As the market disruption continues, we’re sticking to a ‘hold’ on Vertu at 47p.

Last IC View: Hold, 31p, 7 Oct 2020