Vertu on track as car prices keep climbing

Between March and August this year, Vertu Motors (VTU) sold significantly fewer cars across all of its divisions than in the same period of 2021. The dealership’s revenue, however, is up by 4 per cent, hitting £2bn for the first time. 

This is because the industry’s notorious supply chain issues continue to push up prices of new and used vehicles. According to Vertu, the average used car now goes for £19,958, almost a quarter more than in the first half of 2021. Meanwhile, drivers typically pay £24,294 for a new vehicle, up 13 per cent year on year. The shortage of stock, therefore, is being more than counterbalanced by higher price tags. 

Despite the supply constraints – or, perhaps because of its strong relationship with manufacturers – the group has managed to build its market share to become the fourth-largest automotive retailer in the UK by revenue. And in a further effort to please shareholders, Vertu has boosted its dividend and announced another £3mn share buyback scheme.

Costs are now the thing to watch. Excluding the government support Vertu received in 2021, operating costs have risen by 11 per cent. This increase has been fuelled by wages, which are Vertu’s biggest operating expense and which have risen by 9 per cent year on year. 

Chief executive Robert Forrester said government support for business' energy costs and the reduction in employers' national insurance contributions will prove helpful in the second half of 2022. However, the group still has 400 vacancies to fill and the UK labour market remains very tight. 

Looking further ahead, some commentators have argued that the traditional car dealership model – with forecourts and enthusiastic salesmen – won’t last. Shopping online for cars, they say, will become the norm.

The travails of online car dealerships such as Cazoo (US:CZOO) potentially undermine this view, and Vertu is still opening plenty of new physical outlets. However, it is also focusing on digital transformation, appointing its first chief technology officer in April. Plus, it has proved willing to adapt in the past: in 2017, it says it became the first UK dealership to offer full online retailing of used cars. 

The more pressing issue is whether people will keep buying cars as the cost of living crisis deepens. However, given that Vertu’s forward price/earnings ratio sits at just 5.7 – well below that of Pendragon (PDG) and Motorpoint (MOTR) – we are willing to take a risk. Buy.

Last IC View: Buy, 50p, 11 May 2022