Claims against Mercedes and VW will boost this takeover target

Anexo (ANX:95p), a credit and legal services provider for motorists, performed better last year than the headline numbers suggest. That’s because the flat pre-tax profit result is stated after a £4mn investment, up from £0.9mn in 2022, in vehicle emissions claims against Mercedes-Benz for which no revenue was accrued in the year. Strip out the investment, and underlying pre-tax profit would have risen 13 per cent to £27.9mn.

It’s likely to be money well spent as Anexo was granted a group litigation order by the High Court in March 2023 to launch a class action lawsuit against the German carmaker. Specifically, the action relates to alleged subversion of key air pollution tests through the use of software to reduce nitrous oxides under test conditions. Anexo has secured more than 12,000 claims to pursue litigation against Mercedes-Benz and will formally serve the claim in early summer.

Anexo’s vehicle emissions claim against VW Group (on behalf of 13,000 claimants) is much further down the road. Analysts believe Anexo, which has a £112mn market cap, could make pre-tax profit of £20mn-£25mn (after litigation funding and marketing costs) based on £3,000 to £4,000 per claim from the VW class action, highlighting the potential for a similar outcome against Mercedes-Benz.

Debt reduction and working capital management

The windfall from funding vehicle emissions claims would make a sizeable dent in lowering group net borrowings of £73mn, debt reduction being a major focus of management. It also explains why the directors have taken the decision to reduce case acquisitions further this year as they aim to improve cash collection rates and working capital management. It should help position Anexo to grow sustainably in the future rather than through increasing debt.

However, the reduction in new credit hire cases will lower revenue from a business that generated 54 per cent of group revenue and more than a third of pre-tax profit in 2022, hence why analysts at WH Ireland have prudently reduced their 2023 pre-tax profit estimate from £29mn to £18.1mn. Please note that the forecasts exclude any windfall from vehicle emissions claims, so Anexo is still likely to deliver profit growth this year assuming a settlement with VW is made.

It’s also worth noting that Anexo continues to invest in its fast-growing housing disrepair business (50 per cent plus return on capital employed). In 2022, the unit settled 2,000 claims and increased its pre-tax profit contribution by 80 per cent to £4.7mn on revenue of £9.3mn. It has a further 3,000 ongoing claims and is expected to become a significant profit generator for the group.

Takeover target

The earnings downgrade and last month’s exit of the former finance director have not helped sentiment, hence why the share price has drifted since I identified Anexo as one of my four takeover targets at the start of the year.

However, priced on a 24 per cent discount to net tangible asset value and rated on a 2023 price/earnings (PE) ratio of eight, there is obvious value on offer. Moreover, a likely hefty cash windfall from the VW class action will not only lower debt but slash interest costs and boost earnings. Hold.

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