Motor dealer Vertu Motors (LON: VTU) had a better than expected first half but it was never going to achieve the bumper profitability achieved in the corresponding period last year. New vehicles remain in short supply and that will hold back progress – probably for at least a year or so – but Vertu Motors will continue to be profitable and cash generative, as well as having strong asset backing.
There are 46 dealerships covering a range of car makers, including the new Toyota franchise site in Glasgow. New vehicle sales were lower but generated more gross profit, as did fleet and commercial sales. Used vehicle volumes and gross profit declined, although the level of gross profit is still high compared with pre-Covid levels.
Aftersales revenues grew, with more vehicles in accidents being repaired because of the continued high cost of used vehicles. There was a decline in service gross margin.
In the six months to August 2022, revenues increased from £1.92bn to £2bn. Underlying pre-tax profit declined from £51.8m to £28.2m, partly due to lower used vehicle profit. Staff costs have increased. The previous year included government assistance that reduced the costs. The dividend was raised from 0.65p a share to 0.7p a share.
Energy costs remained stable, but the gas supply contract ends in October. There is investment in solar generation to eventually contribute around 10% of energy needs and LED lighting is being installed.
Future
Net cash was £17.8m at the end of August 2022, although additional capital investment means that the figure could fall to £13.4m by the end of February 2023. Even so, along with cash generated from the operations, Vertu Motors has available finance to acquire other dealerships at a time when valuations become more realistic after last year’s bumper profits.
Zeus has upgraded its 2022-23 pre-tax profit forecast from £35.4m to £38.3m, although it is still expecting £36m for 2023-24 despite a rise in anticipated revenues. Higher energy prices will have more of an effect next year. Earnings are raised for both years because of a lower tax rate. A £3m share buy back programme could also enhance earnings.
The share price recovered by 2.75p to 46p after the interims. That is just above the low for the year and it is also well below the net tangible assets of 71.2p a share. That could rise to 72.7p a share by February 2023.
The current rating does not reflect the strong market position of Vertu Motors. The shares are trading on less than six times prospective earnings at a time when trading conditions are not ideal. It may take a long time for the supply of vehicles to return to a more normalised level, but Vertu Motors has shown that it can remain highly profitable and take advantage of opportunities while it waits for that to happen.