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Vertu holding on against the odds

Tough trading conditions have had an effect, but the group is still standing firm
October 9, 2019

Once again, Vertu Motors (VTU) has put in a strong performance against a weak backdrop. Most of the group's sales come from used cars, and activity in the market held up well by comparison with new registrations. The division saw like-for-like (LFL) sales growth of 3.3 per cent, but supply began to outpace demand between April and June, leading overall prices to fall at the fastest rate since 2014 – at least until early July. 

IC TIP: Hold at 33p

Prices have since stabilised, but nevertheless gross margins fell 50 basis points to 8.3 per cent in LFL terms. Aftersales and new fleet and commercial vehicles provided a greater proportion of gross profits, spurred by price increases and a rush to register vans before the introduction of emissions regulation in September.

The used car and services divisions have strengthened since the period-end, generating higher revenues, but the new car market has continued to weaken, with LFL down another 1.6 per cent in September.

Concerns about the auto retail sector are front of the mind for investors – after all, Vertu’s share price currently sits below its net tangible asset value – but its management team sees opportunities in the trouble. The board expects the number of dealerships to fall in coming years, leaving the biggest players with ample opportunities for consolidation and improved profit potential. 

Effective M&A will be a key differentiator, therefore, and management has made dealmaking a key part of its strategy. Its pipeline is reportedly strong, with some opportunities being brought to the group by the car manufacturers themselves. The group’s financial firepower looks good too, with a drop in capital expenditure resulting in cash generation climbing £12.7m to £14.6m. 

The growth of online retailing also presents an opportunity. Vertu’s chief executive Robert Forrester said that while the conversion rate for buying a vehicle purely online was vanishingly small – around 0.6 per cent – the use of online tools for research meant it was becoming an important battleground for attracting customers. The group aims to create a good shopping experience whether they are online, in a dealership or over the phone, and so plans to invest heavily in developing a multi-platform approach. Online investments in the period led to a 43 per cent decrease in website load time and the development of a chatbot that helps customers book cars in for servicing.

Broker Liberum is forecasting adjusted EPS of 5p in FY2020, flat on the prior year. 

VERTU MOTORS (VTU)   
ORD PRICE:33pMARKET VALUE:£122m
TOUCH:32.75-33.25p12-MONTH HIGH:43pLOW: 31p
DIVIDEND YIELD:5.0%PE RATIO:6
NET ASSET VALUE:75p*NET CASH:£29.1m**
Half-year to 31 AugTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20181.5617.33.710.55
20191.6516.13.480.60
% change+6-7-6+9
Ex-div:05 Dec   
Payment:17 Jan   
Includes intangible assets of £112m, or 30p a share **Does not include IFRS 16 lease liabilities of £88m