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AM100 2018: PLCs diversify strategies to deal with challenging year

AM100 logo 2018

For businesses subject to the demands of shareholders and the stock market, uncertainty within the automotive sector and the economy as a whole over the past year has probably created more challenges than any recent era outside of a recession.

Among the seven stock market-listed dealer groups in the AM100, the strategies to meet those challenges have been varied.

 

Turnover

Lookers and Marshall Motor Holdings stand out when it comes to sheer turnover growth during the past couple of years.

Marshall registered the biggest rise in turnover during 2017, as it reported a record turnover of £2.27 billion, up from £1.9bn.

The group benefited from its 2016 acquisition of Ridgeway, with new car registrations up 12.3% overall last year. Marshall’s like-for-like new car performance declined by 2.6%, outperforming the wider market, which was down 6.8%.

Marshall’s chief executive, Daksh Gupta, said total new vehicle revenue had grown by 18.6% (1% like-for-like), to £1.17 billion, and total used vehicle revenue grew 21.1% (7% like-for-like) to £869.7 million during the period.

For Lookers, a 14.9% increase in turnover, to £4.7bn, followed the 2015 acquisition of Benfield and Knights BMW and Mini dealerships as well as the Drayton Mercedes-Benz dealerships in the second half of 2016.

However, Lookers’ accounts also showed the results of its focus on fleet, which saw its revenues in that division rise by 19%. Revenues from used cars increased by 19% (to £1.7bn), or 13% on a like-for-like basis, and its aftersales turnover (£516m) was up 16% compared with 2016.

Pendragon’s turnover increased 4.5%, to £4.74bn, in 2017, but underlying profit before tax fell 19.9%.

The performances of Caffyns and Cambria may both appear more flat on our graph, but the fortunes of the latter have clearly improved upon scrutiny of the raw turnover data, ahead of a dip in interim results at the start of this year.

Cambria’s full-year results (to August 31, 2017) show its turnover has risen by an impressive 82.8% during five years of steady growth to 2017, to reach a current record level of £644.3m.

An interim report for the six months to February 28, however, show Cambria’s top line may be about to take a hit as the group re-aligns itself in the market.

Vertu and Caffyns were the only publicly listed groups to register a fall in turnover during their most recent sets of full-year results.

Vertu’s annual financial results for the year to February 28, 2018, showed turnover of £2.796bn, down 0.9% on 2017’s £2.823 bn.

Rises in used vehicle revenues (up 3% to £1.069bn) and service revenues (up 3.5% to £228.2m) were not enough to offset an 8% decline (from £909.4m to £836.5m) in Vertu’s combined new vehicle retail and Motability revenues.

The group – which has grown revenues by 308% in the past decade – could be set to resume its growth, however, with Robert Forrester, its chief executive, suggesting that the tight rein kept on finances had put Vertu “on the front foot” to make acquisitions.

He said: “When a market’s in decline you don’t buy things, because the value is likely to be cheaper in the future.”

 

Profit before tax

With demand for new cars waning in 2017 and demand for used car stock on the rise, margins have been squeezed hard during the past 12 months.

Most of the AM100’s PLCs have managed to cut their cloth to ensure profitability was maintained during a tough operating period, however.

Lookers recorded a profit-before-tax (PBT) figure of £58.4m, down 26.6% on 2016’s £79.6m, which the group said was the result of an exceptional profit of £28m realised by the sale of its parts division to Alliance Automotive in late 2016.

Gupta hailed Marshall’s 14.4% rise in underlying profit before tax as “excellent” as PBT rose 140% to £53.1m (2016: £22.1m).

Cambria’s PBT fell 4.2% to £11.8m, however. Gross profit dropped 2.5% to £35.2m, with the new car division down £1.5m, used cars up by £0.2m and aftersales up £0.4m.

Despite faltering amid its recent franchise re-shuffle,  profit figures have shown a level of growth to outstrip its rising turnover in recent years. In the five years to its latest 2017 annual results Cambria has realised a 310.8% rise in profits, from £2,751,000 to £11,300,000.

Profits also declined at Pendragon as the business readjusts itself to take greater advantage of opportunities in the used car sector.

A 10.5% fall in PBT to £65.3m (2016:£70.3m), was attributed to declining “new revenue in the year and the margin impacts in the third quarter” by the group and prompted chief executive Trevor Finn to once again voice his vision for the business.

Finn said the group now has a “clear focus and direction to transform the business and double used revenue by 2021” with growth to be driven by its “market-leading software business”, Pinewood, and an expansion of its used retail and aftersales representation points.

Despite Forrester’s efforts to cut costs at Vertu – last year he told AM that he would leave “no stone unturned” in the pursuit of savings – the group’s latest set of financial results showed an adjusted PBT down 9.2% year-on-year, from £31.5m to £28.6m.

 

Debt

A recent analysis of gearing ratios among the larger and smaller groups of the AM100 revealed that, despite wielding greater financial might, UK motor retail’s biggest groups had been exercising greater caution when accruing debt.

Perhaps in anticipation of a financial crash such as that experienced in 2008, and at a time when the sector is battling the double uncertainties of Brexit and consumers’ wariness about new diesel vehicles, retailers are adding resilience.

The PLCs’ financial results suggest this trend has continued, with many showing signs of shoring up their war chests.

For example, Marshall Motor Holdings’ sale of its Marshall Leasing Division, for £42.5m to Bank of Ireland, helped the group to reduce its debts by more than £116m, to just £2.2m, during its 2017 financial year.

Cambria has managed to reduce its debt by more than 47% since 2014, from £35.6m to £18.8m, with  a reduction of 45% between 2015 and 2016, while Forrester’s leaner operating has resulted in Vertu reducing its debt by 63.5%, from £26.8 million in 2014 to £9.8 million last year.

However, Lookers and Pendragon both increased debt, according to their latest annual financial results.

Net debt at Lookers increased by £23.7m on the 2016 figure during 2017, but the group attributed this to a higher level of working capital and the delayed sale of operations in Glasgow and Dublin.

Pendragon continues to invest in the growth of its Car Store used vehicle sites, and its debt increased by 35.3% year-on-year in its most recent results.

This followed a 58% reduction, from £218.4m to £91.7m, in the prior year, however.

Pendragon’s debt is likely to reduce following the disposal of its US car retail outlets as part of its new operational plan.

 

Operations

All the listed groups have outlined changes to their operations:

 

Caffyns

Caffyns has set its sights on making “higher returns on capital from fewer but bigger sites”, according to its annual financial results (to March 31, 2018).

As part of that plan, the Eastbourne-based retail group, which operates 12 sites across Kent and Sussex, is currently developing an all-new Audi showroom in Angmering to facilitate the relocation and expansion of its Worthing business and intends to expand its Volvo operation in Eastbourne.

However, Caffyns reported a 16% decline in profit amid “very disappointing” performance from its volume car brands.

Overall, new car registrations fell 9.2% and its used car sales performance was flat during the period. As a result, operating profit fell to £2.3m as revenues rose by 0.5% (from £212.6m to £213.7m) during the period.

It described results from its Volkswagen division as “very disappointing” and added that customer confidence in the Vauxhall brand being “nationally at a low level” had resulted in losses for its Ashford dealership.

Caffyns said it would not be one of the sites subject to Vauxhall’s cuts, adding: “A reduction in the number of dealers should improve the profitability of the remaining operators.”

Citing the Government’s re-rating of commercial properties, implemented in April 2017, in the £0.25m rise in its cost of business, Caffyns also sought to highlight its freehold property portfolio, adding: “Our property portfolio provides additional stability to our business model.”

 

Cambria Automobiles

Cambria Automobiles reported a drop in revenues and profits in interim results for the period to February 28, as it restructured its network to include more luxury and premium franchises.

The dealer group, No 23 in the AM100, posted interim revenues of £295.1m, down 4.5% year-on-year, while underlying pre-tax profits dropped 14.3% to £4.8m.

Cambria’s new vehicle sales fell 16.2% (like-for-like down 14.1%) and used vehicle by 6.7% (0.8% down like-for-like), although profit per unit rose 7.3% (9.7% up like-for-like).

Those figures followed an annual result (the year to August 31, 2017) that reported a 4.9% rise in revenues to £644.3m (2016: £614.2m) and underlying profit before tax up 6.6% to £11.3m.

In January, Cambria acquired Bentley Essex and Kent from Jardine Motors Group, it opened its first McLaren dealership – in temporary facilities at Hatfield – and began the year-long construction of a motor park in the town to hold Jaguar Land Rover, Aston Martin and McLaren.

Bentley Essex has been relocated to a former Alfa Romeo and Jeep franchised site in Chelmsford, beside Cambria’s new Lamborghini showroom, while Bentley Kent

was relocated to Cambria’s former home of Mazda and Honda at Tunbridge Wells.

Construction of Swindon’s new Arch-style Jaguar Land Rover dealership is expected to be completed in July.

Mark Lavery, the chief executive of Cambria, said the developments were progressing well and, once completed, would “support the group’s long-term trading prospects”.

 

Inchcape

Inchcape’s global reach in automotive retail and distribution businesses helped to offset the UK market’s “slower growth” in 2017.

The group’s annual financial results showed operating profit for the UK and Europe fell by 17%, to £89.8m, as turnover from retail operations in the region fell by 7.5% to £4.74bn.

Globally, group sales of £8.9bn were up 9.4% year-on-year across its retail and distribution business. Inchcape said it saw “particularly strong performance in emerging markets”.

Stefan Bomhard, Inchcape’s group chief executive, said: “Our global diversification and distribution-focused business model have been a clear advantage over the year.”

He claimed the group’s focus on aftersales as a means of realising the inherent value in the UK’s high total industry volume (TIV) was reaping rewards.

In January, Inchcape appointed Nigel Stein as its new chairman, following the retirement of long-standing incumbent Ken Hanna.

Inchcape’s 16 Hunters Land Rover and HA Fox Jaguar centres were rebranded under the Inchcape name in early 2018, aligning them with the group’s 107 locations.

In February, the group also announced plans to open a new JLR franchise in Derby next year after acquiring the city’s former cattle market site. The new facility is expected to be fully operational by summer 2019.

 

Lookers

Lookers recorded a 14.9% increase in turnover and a 2.7% increase in operating profit as it worked to “reappraise” its franchise portfolio in the period to December 31, 2017.

The closure or sale of 15 underperforming sites and job losses “into three figures” were made ahead of a set of results that credited fleet sales and improved efficiencies in aftersales departments with the buoyant financial returns.

Total turnover for the period rose to £4.7bn (2016: £4.088bn) as operating profits – before amortisation and impairment of intangibles – rose from £82.5m to £84.7m.

Adjusted profit before tax of £68.4m was up 5.4% on 2016’s £64.9m, excluding the £28m realised by the sale of its parts division to Alliance Automotive in late 2016.

At the start of 2018, Lookers opened new Jaguar and Volvo showrooms in Glasgow as part of a £12m investment.

It added a further Volvo dealership, in Stockport, to its portfolio as part of a separate £4m venture.

In April, the group announced the closure of its Vauxhall dealerships in Yardley and Warrington following the manufacturer’s decision to terminate all its franchised partners’ contracts.

A statement issued by Lookers said: “We can confirm that there are no plans to close any other Lookers Vauxhall branches and we will continue to work in a successful partnership with Vauxhall at all other sites.”

 

Marshall Motor Holdings

Marshall is another group looking to balance the right franchises in the right locations in order to weather 2018’s current market uncertainty.

Gupta described the record turnover of £2.27bn (up 19.5% year-on-year) and underlying profit before tax of £29.1m (up 14.4%) reported in the group’s 2017 annual financial results as “excellent” and a result of Marshall “outperforming the market”.

In November, he spoke to AM following the announcement that it would be closing five franchised dealerships and a used car centre after a review of the business.

The closures included Citroën Cambridge, its last representation point for the French brand, plus Honda Mountsorrel, Nissan Boston and Vauxhall Welwyn Garden City.

The fifth franchised dealership to close was Maserati Oxford, which Marshall said shares a “subscale site” which has a high, fixed cost base along with a used car centre, and the group said it was not sustainable in the longer term.

“What we’ve done is taken a proactive and decisive step to underpin the profitability of the group, to try to maximise the returns for shareholders, and to try to redeploy as many people as want to be redeployed,” Gupta told AM.

 

Pendragon

Following 2017 annual results that reported a 19.9% fall in underlying profit before tax, Finn re-stated Pendragon’s intention to “double used vehicle revenue” in the period to 2021 and that it had a “clear focus and direction to transform the business”.

A 4.5% increase in turnover, to £4.74bn, and signs of strength in its used car, aftersales and software operations helped to restore some confidence following an October profit warning that prompted Simon English, The Evening Standard’s City expert, to observe that the “bottom just fell out of the UK car industry”.

Pendragon attributed the fall in underlying profit before tax, to £60.4m, to declining “new revenue in the year and the margin impacts in the third quarter” and said it showed the effects of the slackening of the new car market during 2017.

Finn said that the 2021 growth target would be realised by Pendragon’s Pinewood software business and by “investment in increasing the used retail and aftersales representation points in the UK”.

Signs that Pendragon’s new direction may be reaping rewards were recorded in a 15.3% increase in used car revenues. Gross profit declined by 1% like-for-like, to £156.3m, however.

Pendragon now has a total of 184 franchise points and opened seven used retail points during 2017 (Amersham, Coventry, Dartford, Glasgow, Gloucester, Reading and Sunbury) to finish the year with 27 used car sites.

 

Vertu Motors

Vertu showed signs of deploying some of its capital to invest in new business acquisitions after a period of stringent cost control within the group.

Following publication of the group’s results to February 28, 2018, Forrester insisted that he was not under pressure from shareholders to deliver growth through acquisition despite a 0.9% fall in turnover, to £2.796bn (2017: £2.823bn), and adjusted profit before tax down 9.2% at £28.6m (2017: £31.5m).

New vehicle retail and Motability revenues were down by 8% (to £836.5m).

Used vehicle revenues rose by 3% (£1.069bn) during the period and service revenues also rose by 3.5% (£228.2m).

However, Forrester said the business was now “on the front foot” to make acquisitions during 2018.

“It’s a tough prediction to make, but we may have hit the bottom ,” he said.

Vertu has embarked on a share buy-back programme, which saw it repurchase 4.53% of the group’s share capital.

An emphasis on property has also seen the group realise a £4.1m profit from sale and leaseback, with the disposal or closure of five underperforming dealerships realising cash of £2.8m, with a further £2m realised from surplus property disposals subsequent to the year end.

The group’s balance showed net cash of £19.3m and available, unutilised bank facilities of £30m with the potential to add a further £30m.



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