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Motorpoint's niche opportunity

The motor retailer's specialism in 'nearly new' vehicles should help insulate it from wider industry woes
October 25, 2018

Motorpoint (MOTR) is the largest independent car dealer in the UK and is focused on selling nearly new car (vehicles that are under two years old and have less than 15,000 miles on the clock). Being independent means the group does not have to follow the diktats of car manufacturers regarding things such as showroom upkeep, financing packages and what cars to stock. This gives management more freedom to focus on profitability, stock turnover and growth, as well as brand-building through the provision of leading levels of service, price, financing options and vehicle choice. We believe all this should put Motorpoint in a defensive position relative to listed peers. That's a big attraction given recent sector-wide share price ructions caused by slowing new-car sales, Brexit-related uncertainties and tighter European emissions regulations in the form of the worldwide harmonised light vehicles test procedure (WLTP). 

IC TIP: Buy at 219p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

‘Nearly new’ proposition

£10m share buyback

Strong set of final results

Discount to peers

Bear points

WLTP introduction

Poor sector sentiment

The efficiency of Motorpoint's operation and the pull of its dealership brand (repeat customers made up 26 per cent of sales last year), provide grounds to hope profitability will hold up well in the face of any knock-on effect on used-vehicle prices resulting from the industry-wide decline in new car sales. Indeed, Motorpoint's inventory days – the average number of days it takes to shift a car – stand at 42, which is substantially below the average of rivals at 74 (see chart below). Mobility of all stock between the group's 12 sites, as well as a rigorous focus on buying cars that are in high demand, underpin the impressive stock churn.

Being free from the constraints typically imposed on franchise dealers by car manufacturers means Motorpoint is free to sell multiple car brands under one roof. It is also easier for it to open sites and the group has medium-term plans to take the estate from 12 to 20. The company also has a very active online presence, including the Auction4Cars.com business-to-business digital auction platform, which offers a route to market for vehicles that do not fit the nearly new criteria. 

During the second half, operating margins are expected to be in line with the 2.3 per cent achieved in the first half, which is encouraging taking into account that this is an industry with notoriously low margins.

For now, trends in used car margins across the industry are positive, particularly as supply is constrained by fewer part exchanges taking place in the new car market. That’s also been helped by the continued availability of personal contract purchases (PCPs) in the UK motor industry. While there are concerns about the sustainability of the PCP financing model, Motorpoint's freedom to source the best financing available arguably puts it in a better position than many rivals to cope with change.

The financial position looks robust. Operating cash conversion was 95 per cent last year and the company ended the financial year with £15.6m cash, with the only debt consisting of £69m stocking finance, which sits alongside £104m of stock. That said, the company's leasehold model means it does not present the comfort of property freeholds boasted by many of its peers. Still Motorpoint was confident enough to commence a £10m share buyback and raise the final dividend by 10 per cent. 

MOTORPOINT (MOTR)   
ORD PRICE:219pMARKET VALUE:£214m
TOUCH:217-220p12M HIGH / LOW:268p144p
FORWARD DIVIDEND YIELD:3.9%FORWARD PE RATIO:10
NET ASSET VALUE:26.4pNET DEBT:£54.3m*
Year to 31 MarTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20160.7318.214.70.0
20170.8215.712.64.2
20180.9920.816.86.6
2019**1.0822.918.77.5
2020**1.1925.721.38.5
% change+10+12+14+13
NMS:3,000   
BETA:0.57   

*Includes £69m stock financing

**Shore Capital forecasts, adjusted PTP and EPS figures