dimanche 14 mai 2017

Vertu Motors

Date de l'analyse:14/05/2017
Cours: 48p
Nb d'actions: 397 269 839
Market cap: 190 689 522 GBP
Net debt: 9m GBP (-21M of net dept plus 30M due to business timing, see capital allocation section below)
EV: 200M GBP

Business

The group is the 5th car dealer in UK. The market is fragmented and being consolidated. Vertu Motors is also participating in this consolidation by purchasing under performing dealer and driving them back to normal profitability and eventually building a scaled franchised dealership. The company wants to grow cash flow by growing revenues, managing margins and working capital. Working capital is very important in this business as accounts payable and account receivable constitute an important part of the balance sheet.

So far, the business has been growing through equity offering. However, the management indicates that they now want to use existing cash flow and debt to fund future acquisitions and capex. The table below show the planned capital additions for the next few years (from the annual report 2017), without considering any acquisition or divestment.



As from 2019, capital additions would be less important and free cash flow should improve.

The growth can be illustrated with the following two graphs representing the growth in sales and the growth in earnings per share.




Big uncertainties exist with the Brexit. Also, sales of vehicles in UK reached a historical high at 2,69M units in 2016, and this is expected to decline in 2017 (http://www.bbc.com/news/business-38516247).



However, Vertu Motors' business is divided into four parts that are better explained from the following extract from the annual report 2017 :  


We can see that after sales and used cars represent an important part of the gross results, which seems to be a good counter cyclical effect to the potential downturn of new cars sales. This would not fully prevent a downturn due to a recession.

Capital allocation

The group has virtually no debt as the annual report indicates a net cash position of 21m GBP, although the managements indicates that 30m GBP should be deducted to that due to the timing of the closing of the balance sheet. With no debt, the group is in a better position compared to competitors in case of a recession. 

Vertu motors pays a dividend with a policy of having net income representing about 4 times the dividend, which seems to be reasonable when growing with a return of investment higher than the cost of capital. I would even prefer no dividend at all in this situation.

The pension scheme is slightly over funded.

Valuation

Return on equity for 2017 is 10,8%. 

The free cash flow to equity (before acquisitions) over the last ten years stand at 12,1%.

EBIT 2017 is 30m (2016 was 26m).
Dluted earnings per share 2017 is 6,04p (2016 was 5,92p)
Book value of equity 2017 is 246m (2016 was 198m) with 33m$ coming from the issuance of new shares.

With the data from the annual report 2017, we have:
EV/EBIT = 200/30 = 6,67 ( equivalent to 15% return)
PER = 48/6,04 = 8 with no debt


Conclusion

The valuation seems to be very attractive for a growing company (although in a growing market during in a cyclical industry) but the sales of new care seems to have reached a peak and it is facing the Brexit. A lot of uncertainties are already priced in, but I would prefer to wait for a drop in the share price, knowing that the fundamentals of the company are very good (no net debt).

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