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Vertu Motors sees growth despite weaker new car market

Top 10 AM100 dealer group Vertu Motors has seen positive results from its aftersales and used car operations during the five months to January 2011, but has had a more challenging time with new car sales.

The trading update comes ahead of the group’s preliminary results for the year ended February 28, 2011 which will be released on May 11.

Pre-exceptional operating profits were ahead of budget and prior year at around £8 million (2010: £6.9m).

Vertu’s private new car sales volumes declined over the five month period by 6.1% on a like-for-like basis.

However, new retail car margins per unit have remained strong for the group during the second half of the year, which Vertu said reflected its performance in earning high levels of manufacturer bonuses.

Overall like-for-like new retail car profitability has reduced for Vertu year-on-year reflecting the reduced post-scrappage volumes.

"New car sales are down, but underlying demand is there," Robert Forrester, group chief executive said, enhanced when manufacturers have compelling retail offers. "When you look at the order take for March, the carmaker with the highest percentage of plan achieved is Seat because it has been running a pay no VAT offer."

Forrester said the underlying economic outlook is "getting better". 

"Consumers know that a new car can be more economical than three years ago. They can save money by buying now."

A cornerstone of Vertu's positive aftersales performance has been down to what Forrester calls "massive amount of focus on customer care".

"Every customer is followed up religiously whether in sales or aftersales," he said. He said he looks for 100% wash and valet provision for service customers, for example.

Fleet and commercial new vehicle sales volumes on a like-for-like basis rose 2.6% over the five month period.

Group return on sale is at about 1%, up from 0.8% last year.

Forrester said: "A large part of our turnover is in fleet. As we continue to buy retail dealerships our retail margins can increase ahead of those in fleet which aren't growing so much. And if we stopped acquiring businesses for the next three years our RoS could reach in excess of 1.5%. But we're not going to stop and so our tendency to target underperforming businesses will dilute returns."

Forrester said the group was on the verge of a further acquisition, but could not reveal details: "We constantly assess opportunities as they arise and judge how they fit into our strategy of geographical concentrations, primarily in the west and east Midlands, as well as manufacturer and management strategies."

In the last 12 months Vertu has established a regional concentration in Scotland, with eight sales outlets. "We will continue to expand here, but it will not be our sole focus." 

Vertu saw aftersales perform strongly over the five month period with like-for-like profit increases in service, parts and bodyshops. Like-for-like turnover in servicing was flat year on year despite a decline in the three year vehicle parc in the group’s franchises of around 5%.

The dealer group focused on servicing older vehicles, increased its service plan sales and vehicle health check processes to keep its aftersales business growing. The group has seen like-for-like profit growth in service, parts and bodyshop operations.

Used car sales increased by 9.6% on a like-for-like basis over the five month period with used car margins per unit increasing on a like-for-like basis.

Vertu said the used car market had returned to a more normal seasonal profile of used car depreciation.

Portfolio development

During the second half of the financial year, Vertu increased its number dealerships from 67 to 75.

Following the acquisition of the Vertu’s first Nissan franchise in Altrincham in September, Vertu has now added the new car Nissan franchise to its Motor Nation used car operation at Darlington.

During February, Vertu relocated its Citroen outlet in Nottingham to new leased premises. In March, alongside this Citroen outlet, the group will open its third Hyundai outlet.

This facility will be the largest Hyundai showroom in the UK. As a result of the Citroen relocation an additional freehold property has become “surplus to operational requirements”.

On February 22 Vertu acquired the entire share capital of Patrick (Holdings) Limited. This company traded as Patricks of Durham, operating the Vauxhall franchise in Durham, Co Durham.

This acquisition adds to the group’s market Vauxhall dealerships in the north east with sites in Sunderland, Newcastle, Hexham and now Durham.

The group paid cash of £1.5m in the transaction, which included a freehold property. The acquired dealership had a turnover of £7m in the year ended December 31, 2010 and the Vertu board expects the acquisition will be profitable from the outset. Vertu now operates 10 Vauxhall dealerships.

Future prospects

Vertu said its sales and pre-exceptional operating profits are ahead of budget and the prior year and it expects its performance for the year ended February 28, 2011 to exceed current market expectations.

Vertu said in its trading update: “The board remains confident that the progress being made by the core business and those dealerships acquired in this and the previous financial year will continue to generate further profit growth for the group.”

Analyst comment - Brewin Dolphin

Year End Trading Update – BUY (Unchanged since 30/08/07) – 12m Price Target: 50p - Current Price: 27.5p – Market Cap: £56.8m

• Ahead of expectations - Vertu is updating the market ahead of its results for the year to 28 February 2011. Results for the 11 months to 31 January are ahead of budget and we are upgrading our adjusted PBT by £0.5m for both Feb11 (to £7.8m) and Feb12 (to £8.9m), equivalent to an 8% and 7% upgrade to EPS. Net cash is likely to be in line with our forecast at £9m after adjusting for acquisitions.

• Strong trading - Aftersales profits grew l-f-l in H2 with gross margins strengthening by 40bps to 42.2%. Used car volumes increased by 9.6% in H2 versus a flat market, a significant outperformance. We see aftersales and used car sales as very important indicators given that these are the areas where management has the most influence. The new car market fell by 26% in the period but Vertu’s volumes only fell by 6% (largely due to smaller scrappage exposure) and the group increased its market share to 2.13% of the new retail car market. Gross margin per unit in both used and new has held up well.

• Excellent progress on acquisition strategy - Vertu has added another 8 outlets in the second half (75 at year end), undertaking a number of acquisitions, including the relocation of its Citroen outlet in Nottingham and franchising its non-franchised Motor Nation used car operation at Darlington with a Nissan franchise.

• BUY - Vertu continues to outperform the motor retail market taking market share and beating expectations. Its acquisition strategy is gathering momentum and the group still has significant firepower. On this basis we see a sub 9x PER and sub 4x EV/EBITDA as extremely good value especially given that the shares are trading at a 20% plus discount to NAV.

Panmure Gordon and Co

A trading update from Vertu shows the company delivering ongoing improvements to its underlying business, while continuing to grow the business both organically and by acquisition.

Cash balances are expected to remain strong despite this investment, supporting a progressive dividend
policy as planned, while property assets held for re-sale could also unlock further value and cash resources as confidence appears to be creeping back into the property market.

To reflect these positive drivers, we upgrade our 2011E adjusted PBT forecasts by 7% and 2012E by 6%, which were already slightly ahead of consensus.

We would expect the shares to react positively this morning on the back of this solid progress and therefore re-iterate our buy recommendation and 60p target price on the shares.

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