Automotive retail and leasing group Marshall Motor (MMH:AIM) represents compelling value at the current price. Sentiment towards car dealerships is presently poor amid uncertain prospects for the UK car market, but Cambridge-headquartered Marshall Motor has an attractive brand mix and a copper-bottomed balance sheet that provides M&A firepower and a margin of safety.

We see scope for a higher share price as Marshall successfully executes its growth strategy and market conditions prove less gloomy than feared.

Strength through diversity

Steered by CEO Daksh Gupta, Marshall Motor derives strength from diversity; its businesses have 104 franchises covering 24 brands, balanced across categories such as ‘volume’, ‘prestige’ and ‘alternate premium’, and operating across 26 English counties.

Record first half results (15 Aug) revealed 33% growth in underlying profit before tax to £18.6m on sales up 43.7% to £1.19bn, boosted by May 2016’s acquisition of Ridgeway. This multi-franchise dealer extended Marshall’s reach into the affluent Home Counties and strengthened ties with brands such as Audi, BMW, Jaguar, Land Rover, Volkswagen and Mercedes-Benz.

The UK new car market has become more challenging, negatively impacted by weaker sterling and growing consumer uncertainty. Despite this backdrop Marshall reported a marginal 0.4% like-for-like decline in new car sales against a 4.8% UK new car market decline. Despite margin pressure in used cars, Marshall still delivered 5.8% like-for-like unit growth, in part reflecting its strengthened online presence.

Encouragingly, higher margin aftersales shot up more than 43% and while leasing profits declined against tough prior year comparatives, ‘a number of new customer account wins’ should drive growth from the second half onwards.

Firepower aplenty

Outperforming the market on a number of measures, Marshall Motor has the balance sheet strength and cash flow necessary to invest in sprucing up dealerships and undertake acquisitions in a fragmented market. Its freehold/long lease property portfolio of £112.5m represents 145p per share or 71% of its net assets which amount to 204p in total. Adjusted net debt of £35.1m is just 0.7 times earnings, giving Marshall plenty of balance sheet firepower.

For the year to December, N+1 Singer forecasts adjusted pre-tax profit of £28.1m (2016: £25.4m) and a 6.1p dividend covered 4.5 times by estimated earnings of 27.7p, placing Marshall on a prospective PE of 5.8 times and offering a 3.8% yield. An upwards move, even to a conservative ten times multiple, would drive the shares to 277p for 71% upside. For 2018, N+1 Singer envisages £28.9m of profit, earnings of 28.2p and dividend growth to 6.2p.

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