Vertu bullish on car pricing dynamics

The share price of Vertu Motors (VTU) increased by 4 per cent as investors enjoyed the automotive retailer’s confirmation of record annual revenues, boosted by higher vehicle prices and the impact of acquisitions. The market also liked the news on the return of capital, with a hike in the dividend and a further £3mn share buyback programme.    

The top-line pricing narrative is old news by now. The much-discussed supply constraints in the car market supported elevated prices and boosted revenues. This was despite overall volumes falling by 0.4 per cent in the year, with used vehicle numbers down by 7 per cent.

Management thinks that “UK used car pricing dynamics are unlikely to change in 2023, even though average prices remain high”. The average selling price for used and new vehicles rose by 12 per cent to £19,987 and 10 per cent to £24,128 respectively, against last year. Whether such gains will continue to be seen is another question. Analysts at investment bank UBS argued in a research note last month that the price cuts seen in the electric vehicle (EV) market could soon spread to traditional cars due to supply and demand dynamics. Watch this space.

Elsewhere, there were positive noises on the integration of acquisitions, which helped the company's number of sale outlets rise by a net 31 in the year and contributed £183mn of revenues. Vertu picked up garage group Helston in December, which the board still expects to deliver over £3mn of synergies in 2025, and also bought two BMW Motorrad sites. 

This activity in the market meant that Vertu pivoted from a £16mn net cash position last year to a £75mn net debt position, excluding lease liabilities, this time around. But this looks manageable. Management is bullish that future free cash flow generation, which was up by £10mn year-on-year to over £54mn, will see debt fall back.

On the costs side of things, wage inflation remains a key concern given that labour is the company's biggest operating cost. Salary costs rose by over £14mn, year-on-year. While the company is not immune to a tight labour market, it is making progress on this front. Vacancies have fallen from the highs of over 500 last year to around 300.

Current trading is encouraging, with trading profits in March and April up on last year despite cost challenges. And a forward earnings valuation of 6 times, according to FactSet, looks undemanding against car retailer peers such as Motorpoint (MOTR). Vertu still has market dynamics playing in its favour, for now. Buy.

Last IC view: Buy, 45p, 05 Oct 2022