A decline in interim profit at motor dealer Vertu Motors (LON: VTU) marks the progress that the company is making. It is highly cash generative and has a strong balance sheet.

In the six months to August 2019, revenues were nearly 6% higher at £1.6bn, with like-for-like growth of 2.3%. Underlying pre-tax profit fell from £18.1m to £17.1m, if the effect of IFRS 16 is excluded.

This has been achieved at a time when car sales are declining, and the used car market was also more difficult in the period – although it has got better since. Vertu has been particularly successful in growing is fleet sales. Aftersales revenues continue to grow and margins improved because of a change in the way that Ford parts are accounted for.

There was a boost in van sales because of regulatory changes on 1 September, so some second half sales were probably generated in the first half.

Cash engine

Net cash, excluding car stocking loans and leases, improved from £10.5m to £29.1m. There is a net cash position even if car stocking loans are included. Some cash is being used to buy back shares at below net asset value.

There is also a growing dividend with the interim increased by 9% to 0.6p a share. A total dividend of 1.7p a share is forecast, which is a 6% increase.

Net debt of £1.2m, including car stocking loans, or net cash of £22.5m excluding them, is expected at the end of February by Zeus. Vertu continues to invest in new dealerships and increasing capacity. The final outcome will depend on the level of further share buy backs.

Asset rich

Vertu has property and equipment valued at £224.4m. NAV is £275.4m and even excluding intangibles, it is still £163.3m. Vertu is still trading at a discount of around one-quarter to that lower figure.

Fixed asset disposals have at least raised book value or generated a gain, so these asset values appear realistic.

Forecasts

Vertu had its strongest ever trading in September. Full year pre-tax profit is expected to decline from £23.7m to £23.5m, suggesting a stronger second half.

At 33.225p, the shares are trading on less than seven times prospective 2019-20 earnings and a forecast yield of 4.9%.

Vertu has shown that it can ride out the problems in the car market and limit the downside. The tough market could also provide opportunities to acquire dealerships and assets that do not have the strong balance sheet that Vertu has.