Pent-up demand propels Motorpoint profit growth

Motorpoint (MOTR) succeeded in increasing its pre-tax profits compared with last year’s first-half period despite sustaining a significant drop in income at the start of the period. Lockdown measures forced the closure of retail branches from the end of March until June. Months of pent-up demand put pressure on the used car dealer’s stock levels, which has been faced with a supply chain that has been operating at “half speed”, according to chief executive Mark Carpenter.

A slowdown in car manufacturing across Europe has hampered car retailers’ ability to meet spikes in demand this year. Fresh data from the Society of Motor Manufacturers and Traders (SMMT) released in November showed that UK car production had fallen by almost a fifth in October compared with last year. 

The trade body urged the government to conclude an EU trade deal with no tariffs. It also flagged concerns over the government’s decision to ban the sale of new petrol and diesel vehicles from 2030 and new hybrid vehicles from 2035. 

Retailer Cambria Automobiles (CAMB) warned yesterday that the recent decisions made to help push the UK towards embracing electric vehicles would force an increase in manufacturer spending on research and development, which in turn would result in price rises for consumers. However, Mr Carpenter noted that a mooted 10 per cent tariff would result in an equivalent increase in the value of his stock. He predicted a sales bounce in the early months of 2021 and growth compared with the same period last year.

Motorpoint endured stocking difficulties

Motorpoint, which sells used cars in stores and online, recorded double-digit sales growth across July to September. The group fared particularly well in its wholesale market, where it sells cars acquired from retail customers to trade buyers. Cars over four years old provided almost double their normal margin. The retailer’s overall gross margin edged up to 9.1 per cent from 7.5 per cent at the end of last year’s first half. Motorpoint succeeded in bringing down its operating expenses by 16 per cent, to £24.3m.

Yet used car stocking has been made tougher for retailers this year. Staffing levels at some compounds where retailers like Motorpoint collect inventories being far lower than usual, as a result of measures like furlough. The market remains strong - used car transactions rose by 4.4 per cent in the third quarter of this year, according to the SMMT. This was partially driven by the changing of number plates in September, which is a lucrative trading period for automotive retailers.

Indeed, stocking difficulties meant that Motorpoint was unable to fully capitalise on the wave of summer demand for cars. “Retail stock…was very hard to find and replenish quickly through July and August,” Motorpoint’s chief executive admitted. “We couldn’t really keep up with demand, to be honest,” he added. 

The emergence of online sales also added a new dynamic to Motorpoint’s half-year, with two-fifths of sales being conducted online throughout the half. Home deliveries, meanwhile, accounted for a fifth of its September online sales.

The impact of pent-up automotive demand has been felt across the car retail sector. Cambria Automobiles chief executive Mark Lavery acknowledged that the summer rebound “went some way to offsetting the damage the pandemic inflicted” during his company’s months of closure. 

Consumers face price rises with Brexit and electric vehicles

Cambria revenues fell by a fifth to £524m in its year to 31 August, while pre-tax profits lowered by 18 per cent to £10.2m. The retailer shared the SMMT’s concerns over the government’s electric car timeline, calling its 2030 target for a ban on internal combustion vehicles “a date without a plan”. 

While neither Motorpoint nor Cambria awarded dividends in their latest sets of results, their respective outlooks are surely brighter than those of Lookers (LOOK), which after months of delay finally released its 2019 annual results yesterday morning. The embattled retailer, which has been investigating fraud in its Audi branch, has made £25.5m in adjustments to historic accounts to correct overstatements in profits over several years. 

Lookers intends to release its interim results in December and subsequently apply for its shares, which have been suspended since the summer, to be traded once more. The retailer yesterday revealed that it had tumbled into a pre-tax loss of £45.5m last year compared with profits of £41.9m in 2018.

Motorpoint, meanwhile, has struck a bullish tone as it heads into what will likely be a turbulent period for the automotive sector, EU deal or no deal. Pressures on incomes may sustain momentum in used car sales, enabled by a general proliferation in the use of motor finance. More than two-fifths of Motorpoint customers use the retailer’s financing when buying a car, while customers are 50 per cent more likely to return to Motorpoint when they use financing.

Motorpoint shares trade at 12 times two-year consensus earnings forecasts, which is roughly in line with its recent history. This seems undemanding for a company with a limited amount of (lease-driven) debt and a flexible cost base that has enabled profit growth during such a tumultuous time for automotive retail. Buy.

Last IC View: Buy, 240p, 14 Jul 2020