There are contrasting fortunes for two large motor dealers this week. Fully listed Lookers (LON: LOOK) had already warned that its interims would be poor, while Marshall Motor (LON: MMH) has managed the problems in the sector more successfully.
Both companies are having to cope with a weak new car market, with flat sales expected in the second half of 2019. Lookers profit has slumped, but Marshall has minimised the profit decline.
Lookers reported interim pre-tax profit of £29.2m, down from £40.3m, on revenues that were 2.7% higher. New car gross profit was flat, while used car gross profit fell.
Restructuring will cost £10m and there will be annual cost increases of £3m for training and compliance. Problems with past compliance led to Lookers referring itself to the FCA and that investigation is ongoing.
Net debt was £79.2m at the end of June 2019, which was reduced by £13m over the six month period.
Lookers finance director Mark Raban bought 50,000 shares at 43.5p each, while non-executive Stuart Counsell bought 220,000 shares, mainly at 43.5p each, although 3,787 shares cost 43.845p each. Counsell did not own any shares before this.
In the six months to June 2019, underlying pre-tax profit fell from £16m to £15.2m. Like-for-like revenues were 0.9% ahead. There was a larger gross profit contribution from new cars in the first half, even though there was a decline in revenues.
Net cash was £5.8m at the end of June, but on the new accounting basis including operating lease liabilities net debt fell from £92.7m to £82.2m.
Marshall has invested in Skoda dealerships that are still to make a significant contribution to the group.
Many car dealers have a policy of getting rid of used car stocks within 90 days. Marshall keeps used car stocks for 56 days. This means it is not hit as hard as its rivals when there are price slumps as occurred during June. Rivals would still have stock dating back to April when they moved into July. The prices of these cars will have fallen since they were acquired.
Marshall increased revenues and volumes, but like Lookers margins were lower. Both had interim gross margins of 6.6%.
There is also a contrast between the dividends of Lookers and Marshall. Lookers’ interim dividend was unchanged at 1.48p a share. Last year’s total dividend was 4.1p a share and there is no guarantee that it will be maintained this year. It may be prudent to trim the final. An unchanged dividend would be covered 1.8 times by prospective earnings.
Marshall previously said that it planned to reduce dividend cover to between 2.5 and 3.5 times. Last year’s dividend was increased from 6.4p a share to 8.54p a share.
The interim dividend was increased by one-third to 2.85p a share. This is to make it one-third of the total. A maintained total dividend of 8.54p a share is forecast, covered more than 2.5 times by forecast earnings.
At 46p a share, Lookers is trading on six times prospective earnings, while the yield on an unchanged dividend is 8.9%. Even a reduced total dividend would provide an attractive yield. However, profit is set to decline slightly next year.
Net book value is around 80p a share, according to Peel Hunt. So, the share price discount to NAV is 42.5%.
Marshall is not immune to the weak car market, but it will do better than Lookers. The September order book is building up. A dip in full year pre-tax profit from £25.7m to £23.2m is expected, with a small uptick the following year. At 141p, the shares are trading on six times prospective earnings. The forecast yield is 6%.
The NAV is 257p a share, so the shares are trading at a 45% discount to that figure.
Lookers has recovery potential, but Marshall is the safer bet under the current market conditions.