Vertu’s shares look really cheap given its very strong asset backing
We believe the market is taking too gloomy a view of franchised motor dealerships operator Vertu Motors (VTU:AIM) and that a 48.75p share price provides a bargain entry point for investors.
The company’s single digit price-to-earnings ratio (PE) is too pessimistic a rating given the improving prospects of the UK’s sixth largest car retailer.
Vertu boasts a pristine balance sheet rich in property assets. It outperformed a tough automotive retail market in March and April.
Canaccord Genuity has upgraded its price target from 57p to 66p following in-line full year results (9 May). These revealed a 9.2% underlying pre-tax profit reverse to £28.6m amid pressure on new car sales and used car margins.
Performance in new and used vehicles was down year-on-year in a difficult UK auto retail sector hurt by sterling weakness, frail consumer confidence and mixed government messages about the future of diesel vehicles.
However, Canaccord draws confidence from Vertu’s more positive outlook. The £183.6m cap’s board says the prospects for the UK new car market are likely to be more favourable and the outlook for used cars is strong, while aftersales prospects are positive.
Nonetheless it says new regulations in September create short-term uncertainty over new vehicle supply.
Strongly cash generative and buying back shares which it believes are undervalued – tangible net assets per share grew almost 15% to 45.4p in the most recent financial year – Vertu upped the dividend 7.1% to 1.5p and also closed the year with a better than expected £19.3m net cash position.
One-off property profits of £3.5m struck during the year attest to the value in Vertu’s freehold and long leasehold portfolio.
And while no acquisitions were made in the period, chief executive Robert Forrester insists the acquisition pipeline is improving with smaller dealership vendors becoming more realistic on pricing.
In his words, Vertu has ‘a brilliant balance sheet’, with a £40m of committed borrowing capacity and potential to add a further £30m if need be, leaving it well positioned to fund future acquisitions.
For the year to February 2019 and excluding any potential earnings accretive acquisitions, Canaccord Genuity analyst Sanjay Vidyarthi forecasts pre-tax profit to decline to £26.6m, ahead of recovery to £28.8m in 2020 and £30.8m in 2021.
Based on the current financial year’s 5.5p earnings estimate, with a 1.6p dividend also forecast, Vertu trades on a low forward multiple of just 8.9-times, leaving plenty of potential re-rating scope.