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Unusual automotive retail upgrade cycle could stall before long, but there’s still value to be found

Quoted car retailers are enjoying an upgrade cycle fuelled by the highly unusual supply and demand dynamics seen in the UK automotive market since the summer of 2020.

Post-lockdown, pent-up consumer demand is being released at the same time as the global semiconductor shortage impacts new car production, which is driving up second hand vehicle prices in particular and boosting sector-wide profit margins in the process.

Given that consumers are still sitting on cash, employment levels are high and wages are rising, demand for cars should remain robust. Yet investors should also note that automotive dealers face threats ranging from digital competition to staffing shortages.

And while supply constraints should underpin vehicle values short term, a reversion to more normalised margins in the medium term is a risk to weigh.

An economic downturn and the increased cost of living could also hit consumer spending on big ticket items.

Based on the valuations of most of the companies in the sector a lot of these headwinds looked priced in and we think the best ways to play the sector are Vertu Motors (VTU:AIM) and Motorpoint (MOTR).


Car retailers are emerging from their biggest stress-test in living memory. Pandemic-induced lockdowns drove massive disruption with car retailers forced to close their showrooms to customers. However, the well-capitalised leading players have emerged stronger from the experience and have also accelerated the digitalisation of their businesses.

Following the takeover and de-listing of Cambria Automobiles, London’s quoted automotive retail sector consists of just six constituents, seven if you include global automotive distributor Inchcape (INCH), which is now listed in the Industrial Goods and Services FTSE supersector, not the Retail supersector.

Pendragon (PDG), the company behind the Car Store, Stratstone and Evans Halshaw brands, has undergone a remarkable turnaround under CEO Bill Berman, the former president and chief operating officer of American automotive retail titan AutoNation.

At the height of the pandemic, indebted Pendragon held merger talks with Lookers (LOOK), though the former’s overtures were reportedly spurned by the latter.

Lookers itself is now restructured and delivering upgrades under newish CEO Mark Raban, who has restored investor confidence following some serious accounting issues.

Other names in the sector include deal-hungry dealership Marshall Motor (MOTR:AIM) and Caffyns (CFYN), the family-controlled outfit that keeps a low profile despite its main market listing.

Marshall is a running Shares Great Idea and continues to test new all-time highs following a series of profit upgrades.

The company has outperformed the new car market whilst benefiting from the strengthening of used car margins. And the ambitious company recently announced another strategic expansion through the £64.5 million acquisition of multi-franchise dealership Motorline, a deal which further increases Marshall’s top tier industry credentials.


Tightness in used car supply has coincided with a period of strong customer demand for used vehicles. Consumers accrued increased savings during lockdown and wished to avoid public transport so car demand went up.

Whilst supply constraints will continue to underpin vehicle values in the short-term, once the logjam breaks, vehicle margins could reduce to more normalised levels.

Car finance expert ChooseMyCar has even warned UK car prices are set to plunge dramatically in the new year due to the combined effect of a potential winter lockdown and the impact this may have on jobs and disposable cash, as well as mounting fuel prices.

Disappointing new car sales data (4 Nov 2021) from the Society of Motor Manufacturers and Traders (SMMT) revealed a 24.6% year-on-year drop in new car registrations to 106,265 in October, the weakest October since 1991.

Though new car registrations fell for the fourth consecutive month, plug-in vehicle uptake remained positive in the month before COP26, with battery electric vehicles equalling their September market share of 15.2% with 16,155 units and plug-in hybrid vehicles growing to 7.9% or 8,382 units.


With physical sales showrooms shuttered during lockdowns, many customers have become more comfortable with purchasing cars at the click of a mouse rather than through a dealership visit.

The listed players face competition from disruptors such as online car marketplace Cinch.

Cinch is owned by the same group which operates Webuyanycar and BCA Marketplace: Constellation Automotive. Investors can gain exposure to Constellation through investment trust NB Private Equity (NBPE) which owns a stake.

Used car website Cazoo, which operates an online showroom and delivers vehicles direct to customers’ homes in the UK and Europe, recently floated on the New York Stock Exchange.

Hype surrounding the listing has seen it command a $7.3 billion (£5.4 billion) market tag, more than all the UK-listed car dealers combined.

However, pure online-only transactions remain a small percentage of overall industry sales and the majority of customers prefer to visit dealerships so they can chat to sales staff and undertake test drives.

As Vertu’s Forrester explained in his full year results review back in May: ‘Disruptors who have recently entered the used car market have very little, if anything, to add to the sector in terms of customer proposition or experience, and they do not sell new cars or in some cases, support customers thereafter with their servicing needs.

‘The best in class in the sector, and Vertu in particular, have a fully established “bricks and clicks” platform and sell far more used vehicles than these new entrants.’

Forrester also emphasised that his charge ‘builds relationships with customers over many years facilitating the supply of new and used cars and customer servicing activities’.

His view is that a ‘bricks and clicks’ model is crucial in this sector, as a network of physical dealerships is vital for the delivery of service and repair work to customers.

‘The fact disruptors to the sector such as Cazoo and Tesla have been developing physical networks is illustrative of their recognition of the need to have a physical presence in addition to their purely online capabilities,’ he continued.


Gross margin – A gauge of the return on each vehicle sold and an indicator of both the pricing dynamics in the market and the pricing discipline of each automotive retailer.

Like-for-like new car sales – A metric that reveals how a retailer’s new vehicle sales have performed versus the prior year. Like-for-likes are often compared with SMMT private registrations to show how the company is faring against the wider
new car market.

Net tangible assets – A useful snapshot of the strength of a car dealer’s assets including property, as well as its net cash position. A fortress balance sheet gives a dealership firepower for future growth including acquisitions in what remains a fragmented UK market.

The growth of electric vehicle sales is reinforcing the need for dealership visits as customers are unfamiliar with the product.

Physical dealerships with established aftersales operations should have an advantage over online only disruptors as the world gradually goes electric, given the need for increased specialist equipment, technology and knowledge to maintain these vehicles.



A share price pause for breath at Motorpoint (MOTR), which Shares added to our Great Ideas list in May 2020 at 190p, presents a compelling entry point for new investors in this used car retailer with an accelerated growth strategy.

With CEO Mark Carpenter at the wheel, Motorpoint focuses on selling vehicles under three years old and an agile omni-channel model suggests it can hold its own against online disruptors.

Motorpoint outlined exciting new growth ambitions alongside resilient full year results in June – its new target is to at least double annual sales to over £2 billion in the medium term, of which more than £1 billion is targeted to be online sales.

In the first half to September 2021, Motorpoint’s revenues sped 57% higher year-on-year, or up 14% on a two-year view, as the company benefited from buoyant used car demand.

However, full year expectations were sensibly left unchanged given uncertainty around a normalisation in used vehicle prices as the supply shortage gradually eases. Numis forecasts a pre-tax profits rebound from £9.7 million to £18 million for the year to March 2022, ahead of £25.6 million in 2023.

Vertu Motors (VTU:AIM) 62p

Robert Forrester-steered Vertu Motors (VTU:AIM) has positive forecast momentum and a strong balance sheet with at least £90 million of firepower to execute on a strong acquisitions pipeline. It is also well-equipped to fend off online-only challengers given its ongoing investments in winning digital capabilities. Buying back shares and returned to the dividend list, Vertu is now guiding to pre-tax profit of at least £65 million for the year to February 2022.

Liberum notes the company has freehold property backing of £229.4 million, net cash of £57.3 million and tangible net assets of £222.6 million or 61.5p a share, meaning the trading business is effectively in for free at current levels.

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