Cambria was established in 2006 with a strategy to build a balanced motor retail group. About eight years on and the group has 28 dealerships spanning the high luxury, premium and volume segments. It is listed on the AIM exchange and has now released its final results for the year ending 2014. The directors and their immediate families own nearly 47% of the total share equity of the company.
Overall, when compared to last year, revenues were up substantially with a £35.4M increase in new car sales and a £20.1M growth in used car revenues, partially offset by an £800K decline in after sales revenue. After the increased cost of sales was taken into account the gross profit grew by nearly £4M to £55.2M. We then see an in increase in staff costs and other admin expenses so that operating profit was £1.3M ahead at £5.8M before a more than doubling of the tax bill meant that profit for the year was £661K higher than in 2013 at £4.2M.
When compared to the end point of last year, total assets increased by some £23.7M, driven by a £10.9M growth in inventories, a £10.6M increase in land and buildings, a £5M growth in goodwill and a £1.3M increase in trade receivables, somewhat offset by a £4.5M reduction in cash levels. Liabilities also increased with a £10.7M increase in vehicle consignment creditors (could this be customer deposits? They could have made it clearer), a £2.6M increase in trade payables, a £3M growth in borrowings, a £1.8M growth in vehicle funding loans and a £1.8M increase in other payables. The end result is a net tangible asset level some £1.4M lower than last year at £22.9M. It is worth noting, however, that the group has a lot tied up in off-balance sheet operating leases with £27.3M payable in total which, when compared to the net tangible asset level, doesn’t look so good. Interestingly in the annual report it is mentioned that the group has a strong balance sheet, which as I’ve mentioned before only seems to come up when the balance sheet seems strong on the surface but is hiding something when one digs a bit further.
Before movements in working capital, cash profits increased by £1.4M to £7.4M before a large reduction in payables was not entirely offset by adverse movements in the rest of the working capital to give a net cash from operations some £2.8M higher than last year at £11.3M. This cash was then spent on property, plant and equipment with a bit left over to cover the acquisition of property that came with the acquisition but not enough for the acquisition of the branch itself so that there was a negative cash flow of £6.7M before financing. This was reduced by some new loans but the cash outflow for the year still stood at £4.5M to give a decent safety net of a £10.3M cash pile. So, the operational cash flow was enough to cover capex but not acquisitions. Also, those payables will have to be paid at some point…
Gross profits in the new car sector increased by £1.6M to £12.3M but margins declined from 6.7% to 6.3%. Organic volumes of vehicles increased by 16.1%, outperforming the market by 5.5% with the strong performance being delivered against general new car registrations increasing by 12.5% year on year. The sale of new vehicles to private individuals was also ahead of the market, being 14.1% higher year on year and commercial and fleet vehicle sales increased by 55% and 9% respectively with these sales being transacted at lower margins, hence the small fall seen.
Gross profits in the used car sector increased by £1.5M with margins falling from 9.3% to 9.1%, and volumes increasing by 2%. This was a reasonable performance and management has concentrated on tight management of its used vehicle inventories. Gross profits in the aftersales business grew by £800K to £23.9M and margins increased from 40.8% to 42.9% with volumes increasing by over 3%. In order to make sure customers are kept on-side the group contact them with service and MOT reminders in a structured manner, using all forms of digital media and traditional communication methods. The continued increase in new car sales gives management confidence of further progress in the important aftersales market.
In July the group completed the acquisition of the Jaguar Land Rover dealership in Barnet from Lookers PLC. The group paid £10.5M in cash for the dealership and the acquisition generated £5M in goodwill. In the year before acquisition the dealership generated a pre-tax profit of £700K. The group have agreed to develop the freehold land fully and build a new JLR dealership at Barnet over the next 18 months at a further cost of £5M. The new building will apparently be a state of the art dealership, enhancing customer experience and make the business much more efficient. Once dealerships are acquired, the group apply an internet social networking strategy for vehicle sales coupled with a support centre and in aftersales, they have a local contact strategy designed to supply customers (I refuse to use the word guest!) with a one stop solution for all their vehicle maintenance needs.
During the year the group invested in a number of their dealerships. During the first half of the year they invested £6.3M in the freehold estate, securing freeholds of the Warrington Fiat and Nissan dealerships and the Croydon Ford dealership, plus additional land for franchise enhancements in Croydon. The investment is in line with the group’s strategy to secure freeholds when the opportunity arises and these investments have reduced the rent payable by £300K, this is a strategy that I agree with, it has to be good for the long term performance of the business to own these premises. In addition to these freehold purchases, the group invested £200K in the re-development of the Oldham dealership to add a Jeep franchise and to bring the site up to current corporate standards for Fiat and there was also £300K invested across the Ford dealerships in line with franchise standards requirements.
The group is somewhat susceptible to interest rate changes with a 0.5 increase in basis points reducing profits by £176K. Other risks include the volatility of the used and new car market and the changes that are potentially made by the car manufacturers to the pricing and margin structure on the new vehicles that the group sells. The group really tries to differentiate itself on customer service and calls all customers “guests”, which might sound a bit pretentious but does seem to underscore the philosophy as the company. There are three four pillars that define the group culture which I suspect is drilled into all new staff members.
There were some strange goings on involving the directors and car purchases. In total the directors purchased 14 vehicles and sold them back to the group. I really don’t know what was going on unless they are close to reaching a target set by a vehicle manufacturer or something?
The economic pressures affecting the mainland European new car markets remain and the UK continues to be well placed to continue the current positive new car market for the foreseeable future. In the first two months of the new year, the group has maintained its growth momentum, delivering results ahead of the business plan and substantially ahead of the comparable period this last year. There are apparently a number of acquisition opportunities under review so it seems likely that another one will be announced during the year – this is the basic strategy of the group after all. In all, the board are confident of making strong progress in the coming year. There has also been an increase in the level of cars sold on PCP which means that customers are more likely to change vehicle for another new one during the terms of the PCP products. Exchange rates also remain favourable and whilst Sterling continues to be strong against the Euro, the UK will be a natural market for the car manufacturers to target registrations. Despite all these positive points, it is unlikely that double digit increases will continue as prior comparatives harden.
At the current share price the shares trade on a P/E of 12.9, falling to a cheap looking 10.1 on next year’s consensus forecast. After an increase of 20% in the dividend, the shares currently yield a not particularly inspiring 1.1% increasing to 1.3% on next year’s forecast from N+1 Singer. The board aims to maintain a dividend policy that grows with earnings but intends to ensure that the payment of the dividend does not detract from the primary strategy to continue to buy and build and grow the group. At the end of the year there was net debt of £4.6M compared to a net cash position of £2.9M at the end of last year but with the loan deals in place, the group has total facilities of £19.3M available to it with a strong hint that some of this will be used for another acquisition.
Overall then this was a decent set for results, profits were up, as was operational cash flow, although this was not enough to pay for the acquisition so the group dipped into its cash reserves and a bit of new lending. The balance sheet could be better and I am a bit nervous by the high levels of operating lease payments going forward. I do like the strategy of buying the freehold to the properties, though, as this should bode well for the future. The dividend is nothing to write home about but the shares to trade on a low P/E valuation. This could be a decent investment but I will not take the plunge quite yet.
On the 15th January the group released a trading update covering the first four months of the year. The group is maintaining the momentum achieved in the last year and trading performance is substantially ahead of the same period of last year which has been achieved in a strong domestic new car market with 2014 recording the highest level of registrations since 2004. All aspects of the business showed strong profit improvement. New vehicle sales during the period increased by nearly 12% on a like for like basis, ahead of the market that grew by 8%. Used vehicle sales were flat compared to the same period of last year on a like for like basis but the gross profit per unit increased.
The all-important aftersales business improved profits by 3% on a like for like basis, but it was up an impressive 11% when the acquisition is included. The Barnet business is performing in line with expectations and the board remains confident about its potential. The board expects the interim results to be significantly ahead of the first half of last year and is confident about the outlook for the rest of the year. The trading performance is also ahead of current market expectations for the year. This update sounds very bullish and apart from the lack of growth in the used car market, it is hard to fault it.
On the 6th March the group released a statement covering the first five months of the year. Once again performance was substantially ahead of the same period of last year and in line with upgraded market expectations. New vehicle sales increased by 10% on a like for like basis, so a slight slow-down from the 12% seen last time, against a market that was up 8% but margins remained robust. Used vehicle sales were once again flat when compared to the same period of last year with gross profit per unit continuing to increase. Profitability in the aftersales operations was up nearly 8% but there was no mention on like for like profits so I presume these fell slightly. Heading into the all-important March trading period, the new car order book is building well and the board expects a strong performance during this month. They continue to explore acquisition opportunities and view the rest of the year with confidence. So, this is another strong update but it can be seen that during the past month, the growth has slowed slightly so sow a small seed of doubt in my mind.
On the 1st May the group announced the acquisition of a Land Rover franchise in Swindon from TH White for £7.56M representing £3M of goodwill payment. The group will draw down a new loan to pay for the £2.25M freehold property and pay the rest out of existing reserves. They are intending to relocate the operation to a redeveloped site alongside their existing Jaguar dealership in the town (what will happen to the current Land Rover freehold is unclear). The acquired dealership had revenues of £32M and a profit before tax of £700K last year and it is anticipated that it will be immediately earnings enhancing. This represents the second Land Rover dealership for the group and paying £3M in goodwill for a dealership earning £700K a year seems to be a decent move to me.