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Vertu back in a giving mood

The car dealer is navigating supply-side issues and wider labour shortages
October 13, 2021

 

  • Used car volumes up on pre-pandemic levels
  • Upward pressure on wage bill

In some respects, half-year figures for Vertu Motors (VTU) reflect some of the main economic developments affecting the UK generally. Supply chain issues, specifically the global semiconductor shortage, have driven up prices for used cars by around a fifth, though the auto dealer is looking at an increased wage bill as it has been forced to incentivise its employees, presumably to stay put at a time of wider labour shortages. On balance, however, investors will be content given the buyback programme announced at the end of August and the resumption of dividend payments.

The wider commercial changes brought about by the pandemic continue to have an indirect impact on trading, though group chief executive, Robert Forrester, believes that the effect of Covid-19 disruption on the industry has been overstated, or at least in terms of any lasting impact. Nevertheless, registration volumes in the UK car fleet market have contracted based on pre-pandemic levels, reflected in a 21.6 per cent decline in fleet sales compared to the six-month period ended 31 August 2019.

As one might expect, revenue from aftersales operations has bounced back strongly from the low point of the pandemic. This higher-margin business segment still generates a sizeable proportion of gross profits (35 per cent). But those profits have pulled back, at least on a relative basis, due to “very high margin growth in the vehicle sales channels in the period”.

Indeed, the used car market has been on the fly, with volumes up 67.3 per cent, or by 10.3 per cent against August 2019. Just as importantly, the related gross margin increased by a single percentage point compared to 2019 at 11.6 per cent. New vehicle sales were there or thereabouts on their pre-pandemic levels and we can only assume there is considerable pent-up demand.

Management highlights the marked increase in net tangible assets as proof positive of continued efficient cashflow generation, evidenced by a conversion rate of 116 per cent. Excluding lease liabilities, net cash stood at £57.3m, a 57 per cent increase on the previous half-year.

Sales momentum has been maintained since the period-end, with record performance in September generating trading profits of £20m. The group now estimates that full-year profits are likely to be more than £65m, well in advance of previous expectations of between £50m and £55m. Though it is difficult to determine when the supply-side issues are likely to ease, a lowly forward rating of 5 times consensus estimates combined with a contracting enterprise/cash profit multiple, encourages us to up the rating to buy.

VERTU MOTORS (VTU)   
ORD PRICE:60pMARKET VALUE:£ 220m
TOUCH:58-60p12-MONTH HIGH:60pLOW: 26p
DIVIDEND YIELD:1.1%PE RATIO:4
NET ASSET VALUE:86p*NET DEBT:11%
Half-year to 31 AugTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20201.123.970.690.00
20211.9251.110.40.65
% change+72+1186+1401-
Ex-div:16 Dec   
Payment:22 Jan   
* Includes intangible assets of £101m, or 28p a share.