Vertu Motors – strong enough to expand further

With a strong balance sheet with low levels of debt, massively improved technology, and profits set to recover next year, Vertu Motors is worth a look, says Mark Watson-Mitchell. 

Who in their right mind would want to invest in the UK motor retailing market currently?

We witnessed car forecourts looking barren during the lockdown, while at the same time travel restrictions almost deadened road traffic for those months.

So why should I be profiling Vertu Motors (LON:VTU)?

What could possibly appeal to me about such a business?

In a few short words – a strong balance sheet with low levels of debt, massively improved technology, profits set to recover next year, and, importantly for this group, the growing ability to acquire other companies within the sector that have been decimated by Covid-19.

The company was set up in November 2006 and listed on AIM one month later.

From the start, its target was one of consolidating the UK motor retail sector. Since then, its policy has been to continue to acquire motor retail operations to grow a scaled dealership group.

Thereafter, its acquisition strategy has been additionally focused upon achieving organic growth by driving operational efficiencies through its expanded national dealership network.

Today Vertu Motors is the fifth largest national motor retailer in the UK operating predominantly under the Bristol Street Motors, Macklin Motors, Farnell Jaguar and Land Rover, Vertu Volkswagen, South Hereford Garages and Vertu Honda brands.

The group’s manufacturer partners are Mercedes-Benz, Vauxhall, Jaguar, Land Rover, Ford, Peugeot, Honda, Audi, Nissan, Hyundai, Citroen, SEAT, Renault, Mazda, Dacia, and Volkswagen.

That is an excellent range of suppliers, especially now when all of the motor companies are throwing large sums of money into an attempt to reignite their marketplace. Advertising expenditure must be at peak levels, which in due course will generate even greater sales across the Vertu network.

In fact, we understand that the group signed off on record sales results in September.

During the lockdown period Vertu concentrated upon its in-house software development team and its mission to significantly improve the efficiency of its processes.

Improvements included its buy on-line and ‘reserve it now’ ability, thereby helping to provide group customers with a seamless purchasing journey.

The team also introduced a fully paperless vehicle sales process, such as customers signing through SMS messaging.

Efficiency improvements were also put into the group’s administration processes, especially in vehicle sales.

Such operating strength will help the group as it continues to grow by acquisition. It is consistently seeking out further businesses, whether profitable or not, to help to expand its national network.

Upon acquisition, its teams move in and eke out efficiencies thereby helping to drive further profits, while adhering to the Vertu disciplines.

There are some 369m shares in issue. Larger investors in the equity include Artemis Investment Management (8.11%), BlackRock Investment Management (6.67%), Close Asset Management (5.75%), Tweedy, Browne Co (5.58%), Miton Asset Management (5.37%), Burgundy Asset Management (5.05%), Ruffer (5.04%), FIL Investment Advisors (UK) (4.78%), R S Teatum (4.00%), and Invesco Asset Management (3.41%).

Last Wednesday the group published its interim results to end-August, showing a Q1 loss during lockdown of £14.3m. They also showed for the half year, sales of £1.12bn and an adjusted pre-tax profit of £4.7m.

There was very strong cash flow during the first half, ending with net cash of £36.5m. And that was after having taken out savings of some £10m of annualised costs.

An interesting point to note is that the group now has net tangible assets of 46.5p per share.

For the full year to end-February 2021, Zeus Capital forecasts £2.62bn sales, adjusted pre-tax profits of £18m (£23m) and earnings of 3.8p per share.

Going forward, Zeus sees sales of £2.67bn in 2022, then £2.71bn in 2023. In the same periods they go for profits of £20.4m, then £22.7m, worth 4.5p then 5p in earnings per share respectively.

Historically the motor retail sector has always been a lowly rated investment in the market. However, with 46.5p of net assets, and trading on just 8 times current year and 6.7 times prospective earnings, Vertu Motor’s shares at just 30.5p have strong upside potential, especially for such an acquisitive group.

My target price is 40p.