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Advice for workers to avoid public transport could help the motor retailer get back on its feet
Thursday 14 May 2020 Author: James Crux

Boris Johnson has encouraged all individuals who cannot work from home to travel to work if their workplace is open, in a bid to end the crippling economic lockdown. He says people should drive or cycle to work rather than use public transport, which suggests there could be greater interest in people buying a car, also helped by petrol prices being below £1 a litre for the first time nationally in four years.

These tailwinds are reasons to buy shares in Motorpoint (MOTR), a used car retailer. Admittedly this is a higher-risk investment as there is still a lot of uncertainty around future earnings growth, however now does feel like a good point to take a contrarian view and consider the shares given that sentiment is so poor towards the sector.

Motorpoint’s advantages include strong service levels and a value-oriented proposition, which drive high levels of repeat business. It mainly sells vehicles up to two years old and with less than 15,000 miles on the clock, from brands including Ford, Vauxhall, Nissan, Hyundai, BMW and Audi.

In March, Motorpoint temporarily closed its 13 retail sites in response to the coronavirus lockdown, a move that happened in the key number plate change month and put a material dent in profits.

As non-essential retailers, car dealerships are likely to be treated a part of a wave of shops allowed to reopen from 1 June, as long as they can keep staff and customers safe.

Investment bank Liberum points out Motorpoint had roughly 6,500 cars in stock at last count, and the level of depreciation taken before they are sold will depend on how long sites are closed and how quickly consumer demand picks up.

The reassuring news, according to Liberum, is that ‘Motorpoint’s low cost, high stock turn model gives it plenty of flexibility to react to market conditions’. Moreover, should it encounter supply-side issues in terms of fewer nearly-new cars, Motorpoint can move into the slightly older car category for a short period.

Reassuringly, Motorpoint has a net cash balance sheet, estimated by Liberum to be £8.4m as of the March 2020 year-end.

Measures already taken to preserve cash include furloughing staff, halving director pay, pausing vehicle purchases and suspending the share buyback and discretionary capital expenditure. Assuming the final dividend won’t be declared, Liberum believes the shares could hit 320p over the next 12 months, implying bumper 68% potential upside.

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