Vertu Motors have now released their final results for the year ended 2017.
Revenues increased when compared to last year (like for like revenues were up £99.4M due to higher volumes of used cars )due to a £187.3M growth in used car revenue, a £112.9M increase in new car revenue, a £61.1M growth in new fleet and commercial revenue, and a £38M increase in after sales revenue. Cost of sales also increased which meant the gross profit was up £50.3M. Wages and salaries were up £26.6M, depreciation increased by £1.9M and operating leases were up £2.1M with other operating expenses increasing by £14.6M. This meant that the operating profit grew by £4.9M. Vehicle stocking interest increased by £1.1M following a temporary increase in inventory as the new car market softened, and tax charges were up £518K to give a profit for the year of £24M, a growth of £3.3M year on year.
When compared to the end point of last year, total assets increased by £28.5M driven by a £44.3M growth in land and buildings, an £18.1M increase in goodwill, a £12.1M growth in used vehicles, a £7M increase in franchise relationships and a £3.4M increase in trade receivables, partially offset by a £36.3M reduction in new vehicle inventories entirely relating to new vehicle stock, a £14.2M fall in other receivables, a £4.2M decline in the pension asset and a £4.1M decrease in cash. Total liabilities decreased during the year as a £27.9M decline in trade payables and a £3.8M fall in long term borrowings were only partially offset by a £5.9M growth in accruals, partly related to an increase in outstanding service plans. The end result was a net tangible asset level of £150.3M, a growth of £23.3M year on year.
Before movements in working capital, cash profits increased by £8.6M to £42.7M. There was a cash inflow from working capital but this was less than last year so after tax payments reduced by £1.6M but finance costs increased by £996K, the net cash from operations was £50M, a decline of £6.7M year on year. This almost exactly covered the £50M spent on acquisitions but not the £25.1M spent on property, plant and equipment or the £4.4M spent on acquiring freeholds which meant that there was a cash outflow of £28.2M before financing. In order to pay for all of this, plus the £5.4M of dividends, the group raised more equity which brought in £33.6M. Overall there was a cash ouflow of £4.1M for the year and a cash level of £39.8M at the year-end.
Of the operating profit of £31.8M, £231K of the £4.7M of growth came from acquisitions.
The gross profit in the Aftersales division was £123.4M, a growth of £20.5M year on year although margins declined slightly due to reduced parts margins as bonus income from manufacturers reduced. There was a 5.1% increase in like for like revenues with service revenues up 5.8% and service margins increasing. The accident repair centre revenues grew 2.9% and margins improved slightly.
Parts revenues grew 5.7% while margins fell from 23.2% to 21.9% due to reduced manufacturer rebates in several key franchises. Manufacturers are increasingly pursuing strategies to increase the efficiency of parts distribution networks and to reduce the supply push of parts into the network. Reduced rebates may arise from these changes but benefits such as a reduction in low margin sales, lower stockholding and obsolescence costs and reduced costs of funding working capital may also accrue to the retailer.
The gross profit in the used car division was £100.7M, an increase of £17.2M when compared to last year. The used vehicle market remained stable during the year from a pricing perspective but sales volumes in the market generally have increased around 6%, augmented by increased nearly new product entering the market as self-registered vehicles. The group saw a strong 7.1% like for like rise in new vehicles sales, benefited from increased and more effective used car marketing approaches. Like for like used car margins grew from 10.1% to 10.6% and gross profit per unit was up £78 to £1,263.
The group’s total new retail vehicle volumes grew by 4.4% but like for like volumes fell by 6.4%. The decline accelerated in the second half of the year with like for like new retail sales volumes down 4.2% in H1 and 8.9% in H2. This decline in volume reflected the impact of the fall of sterling against the Euro following Brexit. Average sales prices rose and some manufacturers started to reduce planned volumes into the UK. Margins were stable at 7.4% while gross profit per unit increased by £59 to £1,196. The like for like gross profit declined by £1M but total margins rose slightly to 7.5% due to the mix of new acquisitions.
The gross profit in the retail and Motability division was £68.3M, a growth of £9M when compared to 2016. Volumes of sales fell by 4.8% on a like for like basis against a 1.1% decline in UK Motability registrations reflecting franchise mix as manufacturers reacted to Sterling’s depreciation in different ways. The Motability market as a whole is seeing slight declines as a consequence of the replacement of the Disability Living Allowance by Personal Independence Payments as part of the UK benefits reform.
The gross profit in the fleet and commercial division was £21.1M, an increase of £3.5M year on year. Like for like sales volumes were down 1.5%. The commercial vehicle business continued to take market share with like for like volumes up 1.6% compared to a 1.2% in UK registrations as a whole. This growth was heavily skewed towards the first half, however, with a slowdown in the second half. One of the key drivers was the change in diesel engine specification in June 2016. The newer models are more expensive so many fleet operators accelerated purchases prior to the change which resulted in a market slowdown after June.
Fleet car supply saw declines in the first half but returned to growth in the second half. Overall like for like fleet volumes fell by 4.2% as the group maintained their pricing discipline in this competitive market. Total gross profit margins rose from 3% to 3.3% and like for like margins rose by 0.1%.
Brexit may impact the group in the areas of changing regulation, currency fluctuations and terms of trade for new vehicle imports to the UK. In the short term the biggest impact of Brexit is the weakening of sterling which reduces the attractiveness of the UK as a market to EU producing manufacturers. Vehicle price rises have been evident along with reducing volumes. In the medium term there could be consequences for the sector if tariffs were to be introduced on motor vehicles entering the UK but potential free trade agreements with non-EU countries may present opportunities for manufactures with non-EU production capacity and the future franchising strategy of the group will need to be aware of these developments.
The contractual relationships between manufactures and franchise partners are constructed within the framework of EU competition law so there is potential for the legal frameworks to evolve in a different direction. The board judge that it is unlikely to be a priority area for the UK government in the short term and the status quo is likely to remain as a result.
In common with most sector participants, the group is in the process of a major programme of capital investment. In particular substantial sums are being invested in increasing capacity and enhancing the retail environment of the JLR dealerships with the implementation of the “Arch” concept. After £25.7M was spent this year, £37.5M is expected to be spent in 2018, falling back down to £20.8M a year later.
During the year the main projects were the opening of major new city centre dealerships for JLR in Leeds and Nissan in Glasgow. These investments represent substantial increases in aftersales and sales capacity on the previous outlets. Both of these major projects were delivered on time and on budget. In addition, major redevelopments were also completed at Hereford Audi, the creation of a Ford store in Gloucester and the redevelopment of Nottingham VW North.
In 2018, major projects are expected to increase existing dealership capacity. These will include redevelopments of Reading Mercedes, Nelson Land Rover, Bradford JLR, Guiseley Land Rover, Shirley Ford and Bolton Ford. The board is confident that the significant decline in capex expected in 2019 will drive enhanced free cash flow from the business from that point in time.
In March 2016 the group acquired Sigma Holdings comprising three Mercedes outlets in Reading, Ascot and Slough, for a total consideration of £30.7M, generating goodwill of £11.9M. The business made a pre-tax profit of £1.2M in the year prior to acquisition. In May 2016 they acquired Leeds Jaguar from Inchcape for a consideration of £592K, generating goodwill of £500K. In June the group acquired Gordon Lamb comprising Toyota, LR, Skoda and Nissan outlets in Chesterfield along with a Skoda outlet in Derby. The consideration came to £18.8M which generated goodwill of £5.8M. The business made a pre-tax profit of £2.7M in 2015 so this looks to be a decent value acquisition. The board have indicated that they will continue to acquire dealerships.
In October 2016 the group disposed of their Fiat dealership in Newcastle; in December they disposed of their SEAT dealership in Barnsley and in January 2017 the disposed of their Peugeot dealership in Worksop. The group received £875K for these dealerships which is about the same as their fair value. In March 2017, after the year-end, the group disposed of their Peugeot dealership in Chesterfield, although they still own the freehold property which it operates from.
During the year the group undertook an equity placing of £35M to provide funds for further acquisitions, which I personally find rather disappointing to see.
In the two months following the end of the year, the group has continued to trade strongly with profits ahead of last year on a like for like and total basis. Margins strengthened and operating expenses on a like for like basis were reduced as efficiency programmes were delivered. Used cars continued to see like for like volume growth and margin improvement whilst service also witnessed growing revenues and stable margins on a like for like basis.
The March plate change month saw a record number of new vehicle registrations in the UK, aided by an element of pull forward of demand due to increasing vehicle excise duty from April, and the timing of Easter. April, as expected, saw a decline in new vehicle registrations of 28% which meant that overall, since the year-end, new vehicle registrations have declined by 3.5%. The group saw significant growth in new retail vehicle profit contribution in the period despite a 9.7% decline in like for like new retail volumes due to pricing discipline and cost controls.
At the current share price the shares are trading on a PE ratio of 7.3 which falls to 6.8 on next year’s consensus forecast. After a 7.7% increase in the total dividend, the shares are yielding 3.2% which increases to 3.3% on next year’s forecast. At the year-end the group had a net cash position of £21M compared to £23.1M, although this is greatly flattered by timing.
Overall then this has actually been a fairly decent year for the group. Profits were up, as were net assets, although this is to be expected given the equity raise. The operating cash flow did decline, but this was due to last year’s very favourable working capital movements and cash profits improved. The group did not generate any free cash, however, due to the continued investment in acquisitions.
Aftersales were strong, as were used car sales as the group improved their marketing. New car sales fared less well, however, with H2 worse than H1 due to forex movements after Brexit and the UK therefore becoming a less-desirable market. Motability sales were down due the benefits reform and a change in franchise mix; commercial sales were up but this masks a poor performance in the second half due to the new diesel engine specifications; and fleet sales were down but conversely there was an improvement in H2.
There is no doubt that Brexit could have a profound effect on this industry and the group is looking at some heavy capex spend in the coming year. Trading so far this year has been pretty good, however, despite the poor April new car sales figures. If the group can hit the forward PE of 6.8 and yield of 3.3% these actually look pretty good value. It is a risky play though given the macro economic issues currently prevalent.
On the 26th July the group released a statement covering the first four months of the year. They saw a strong performance in the plate change month of March followed by softer trading in April, May and June resulting from less favourable market conditions. The board believe that the market softening is linked to the Vehicle Excise Duty increase in April, the impact of sterling depreciation on new vehicle pricing and customer uncertainty regarding the general election and the macroeconomic environment. Pricing disciplines and cost control minimised the impact on the group’s profitability and they delivered higher like for like profits year on year.
As a result of the deteriorating market trends, the group saw a softening of new retail volumes and used vehicle margins, reflecting a downturn in consumer confidence from April onwards. Aftersales like for like revenues and profitability increased in the period, underpinned by the group’s retention strategies which make this growing revenue stream resilient. At this stage, the board expects the group’s trading performance for the year as a whole to be in line with market expectations.
The group is actively engaged in the disposal of freehold assets which are not required for the ongoing operations of the business. Two transactions which are contingent upon planning applications are currently being progressed which is expected to yield cash of around £7M this year. The group is also looking to start a share buyback programme for an amount of up to £3M.
This seems of a bit of a strange situation. So, we saw the group raise capital in the market and they are flogging off some of the freehold but at the same time they are buying back shares. Quite strange, and the market looks tough out there but the shares may now be cheap enough to look interesting?
On the 1st September the group announced they continued to trade in line with the trends set out in the last update and in line with market expectations. At the end of August they disposed of their freehold JLR dealership property in Leeds and entered into a sale and leaseback commitment for 15 years on the property. The consideration for the sale, settled in cash, was £14M which generated a profit of £4M on the sale.
I am not sure of the logic of doing sale and leasebacks when they continue to buy back shares. Surely the better option for the long-term health of the group would be to keep the freehold?