Patient contrarians should take a look under the hood of automotive retailer Vertu Motors (VTU:AIM), unfairly overlooked at 46.5p per share. Able to withstand industry challenges given an asset rich, ungeared balance sheet, the £183.8m cap is grinding out profitable growth in relatively challenging car market conditions.

Motoring on

Steered by industry maestro Robert Forrester, Vertu Motors sells new and used cars from its franchised dealerships and also carries out high quality and higher margin aftersales servicing.

Half year results (11 Oct) revealed 7.2% improvement in adjusted profit before tax to a record £20.9m, delivered in difficult new car market conditions. Vertu’s like-for-like new car retail volumes were down 14.7% as weak sterling reduced the supply and increased the prices of new cars. Management is sticking with its full year guidance, though analysts’ earnings forecasts for 2019 and 2020 have been downgraded.

Quality operator

‘We think the growth in first half profit is a function of management calling the market correctly at the start of the year and pulling the necessary levers early,’ explains Canaccord Genuity’s Sanjay Vidyarthi, maintaining his ‘buy’ rating but lowering his price target from 75p to 67p. ‘This signals the quality of the business and how well it is positioned to consolidate the market over the next few years as weaker competition flounders.’

Rather than overpaying for deals in the half year period, Vertu bought back £1.6m of shares and plans a further £3m of repurchases. The dividend was lifted 10% to 0.55p and Forrester stresses ‘we’ve got a brilliant balance sheet’.

Armed with £20.8m of net cash, Vertu’s net assets of £264.6m equate to 67.5p per share and include freehold property worth £175m. With low levels of used car stock financing, Vertu has a five-year acquisition facility of £40m with the potential to add a further £30m. This provides formidable firepower ‘for what could be quite significant acquisitions over the next 18 months’ as rivals struggle, according to Forrester.

Shares notes that US-based value investor Tweedy Browne – which buys stocks at significant discounts to intrinsic value – beefed up its holding in Vertu to 5.1% in August. For the year to February 2018, Canaccord forecasts a nudge up in adjusted pre-tax profit to £31.6m (2017: £31.5m) for earnings per share of 6.4p, leaving Vertu on a grudging PE ratio of 7.3. Pre-tax profit is forecast to rise to £31.7m in 2019 ahead of £32.7m in 2020.

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