Vertu Motors H1 pre-tax profit up, sees FY results ahead of view; stock climbs
With a strong consolidation strategy and more expensive cars in its showrooms, car dealer Vertu Motors (VTU) has just reported record interim profit growth and its eighth consecutive half-year increase in like-for-like used car sales. Even the unfortunate timing of its VW dealership acquisition is paying off, so far.
Just ten days after the Volkswagen diesel emissions scandal blew up, Vertu said it had paid £12.8 million for VW and Audi dealerships, with a further £1.5 million deferred. Although it’s early days, management has not seen any significant decline in the operations.
“I’m interested in making shareholder value in the long-term and I’m not going to let short-term stuff get in the way, if I am honest,” chief executive Robert Forrester told Interactive Investor. “But it’s a great acquisition for us and it is a very high-performing business.”
Vertu’s 119 car dealerships, which now include more premium brands like Jaguar and Audi, generated revenue of £1.2 billion in the six months ended 31 August, up 14%. That dropped through to pre-tax profit of £16.4 million, up 28% and a new record, giving earnings per share of 3.82p. Strip out amortisation of intangible assets, and profit hit £17 million.
And over 80,000 people are now paying for Vertu’s higher margin service plans every month, with customers locked in for three years. Revenue here jumped by 6.2% jump to £93.8 million, but margins are significantly higher than elsewhere in the business – gross margin is 44% versus 7.3% for the new car retail division. After an “absolute stellar performance” in the group’s largest profits-maker, the aftersales division now represents 8% of group sales.
Another core part of the business, used cars are the group’s second largest profits contributor, generating £42 million in the period. “Our business does well when we are good at used cars,” said Forrester.
‘Grow or die’
The group hasn’t turned its back on volume dealerships, either, adding VW brand Skoda and France’s Renault forecourts to its portfolio. With the mantra “grow or die” and the capacity for further consolidation, Forrester is keeping his eyes peeled for further consolidation opportunities. With no debt and over £32 million cash in the bank, the boss knows what he wants.
“I got an information memorandum at 20:02, and by 20:06 I had turned it down. We haven’t got time to mess about with things, if it’s not for us then we don’t do it,” he said.
Cash generated from operations more-than doubled to £37.6 million in the six months, which has allowed management to raise January’s interim dividend by 29% to 0.45p per share. Every Friday night management get a written report on each aspect of cash management – in their own words they are “on it like a rash”.
“We put a lot of effort into working capital management and a lot of things went right for us,” explained Forrester. “On a £2.4 billion business, our cash flows fluctuate wildly, but in this period it was good. If we make profit we like to turn it into cash, it’s very important.”
The group’s fleet division is the least cash generative aspect of the business, new cars is “pretty good” – as payment is made before collection – and, although the group’s £70 million worth of used car stock absorbs a lot of cash, aftersales has an industry-leading 115% return on investment. The services business is also good for working capital as it receives cash in advance from the 80,000 customers paying monthly for the service.
“It’s complicated and it varies across the streams, but we just have to manage it tightly,” Forrester explains.
Things are looking good for the sixth-largest car dealership for the rest of the year.
“The outlook is pretty positive and the UK economy continues to grow. So as long as we have a positive economy we will be in a good place. But actually aftersales is very defensive, so even if car sales dip you can still grow aftersales for five years because it is very slow in its build-up.
Vertu currently trades on about 12.5 times forward earnings, although that includes over 9p of cash per share. Strip it out and the ratio drops to an inexpensive 10.8 times.
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