Vertu Motors Plc. Fits within the current holdings position. This business is a category 2, whereby it has identifiable moats, whilst requiring highly competent management.
Vertu Motors should be viewed as a medium – long term investment, compounding earnings at an above market average rates. The current undervalued price allows for a future win-win for buyers of this company.
1. Vigilant Leadership
Total Shareholder return:
Source: Annual Reports
- Annual Bonuses – maximum is 135% of base salary
- Targets based upon E.B.T (Earnings before tax)
- Long term incentives – Nil cost options, maximum 125% of base salary
- Targets based upon Total Shareholder returns and Return on Equity
2. Long term Prospects
Automative Retailer – Vertu Motors sells new & used cars, motorcycles, commercial vehicles as well as provide after sales services. Operations occur through franchised automotive and truck dealerships, with over 120 outlets across the UK.
- The automative dealership industry will continue to obtain persistence in the UK economy. Although, many changes to automative manufacturing is likely to occur over the coming years, consumers will still require dealership outlets to buy/sell vehicles.
- Vertu Motors operates a 3 year service plan, whereby customers pay monthly for after service, this again adds further longevity to the companies future.
- Vertu has strong relationships with the main auto manufacturers including Ford, Vauxhall, Volkswagen, Jaguar Land Rover, new edition Mercedes Benz and many others. All of these manufacturers and others are top leaders in Europe and add further prospects for Vertu providing they maintain strong relationships.
- Online chains such as Bristol Street Motors and Macklin Motors allows customers to obtain greater convenience in vehicle choosing, customisation and finance options. Thus, extending the companies runway.
- Technological giants and car manufacturers are spending Billions on cleaner engines and electric car research and development.
- Nonetheless, Vertu Motors currently through its diversity is connected to the most prolific car manufacturers whom are likely to expand into such technological realms ensuring the franchises remain in strong competition.
- Consolidation in the global automotive industry will force many car manufacturers to work closer with technology giants (i.e Apple) in order to make the transition. This potentially could put Vertu at a long-term disadvantage.
It is good to note, that Vertu Motors Annual Reports begin with the companies weaknesses/risks. This order of presentation is counterintuitive and I have only read this order before in Berkshire Hathaway Annual letters by Warren Buffett.
- Failure to acquire and consolidate UK motor retail business
- Failure to meet Competitive challenges
- In ability to maintain high quality relations with manufacturers
- Failure to attract, develop and retain high quality people
Solutions to above risks:
- Maintain strong relations with manufacturers to ensure the company remains at the forefront for new dealership opportunities.
- Maintain high quality customer experience to attract customer loyalty.
- Consistent improvement and communication with manufacturers to ensure values and objectives are in sync.
- Significant Investment in formalised training and development programs.
3. Stable and Understandable Business Economics
Source: Buffett books
Understandable business economics
The automotive retail industry and others alongside, has seen recovery in recent years in the UK and globally. 2015/16 displayed a major gain for operators as economic conditions trailing 2015 were improving and consumers whom had delayed purchases returned to the market.
Furthermore, weakness in the wider European market, other export markets including China and attractive finance deals further contributed to the increase in registrations.
- Overall the industry is expected to grow at 5.6% (normalised) compounded over the next 5-10 years.
- 2017 may see slight reductions in growth due to 2o15/16 being an outstanding and unusually high year for growth in the industry, as well as the implications from Brexit.
- The automotive retail industry is approximately valued at £16 Billion in the UK.
Barriers to entry:
- Contracting dealership numbers – More difficult for new entrances to obtain franchises.
- Increasing loyalty service to franchises.
- High costs required to attract, develop and retain highly skilled workforce and salespeople. (Vertu as appointed the ex-CEO of Mitsubishi and former director at Dyson = highly skilled and knowledgeable individuals.)
- Increasing Return on Invested capital – Making Vertu more profitable alongside consistently reducing operating expenses
- Strong/high quality management
- Experienced business units
- Provide monetary assistance to customers
- High past & future growth rate potential
- Good acquisition turnaround strategy
- Cheapest in terms of value amongst competitors
Major Business segments:
* Automotive Retail * Used cars&vans *New car retail * After-sales services (Inc. servicing, supply of parts and accident repairs) * New commercial * Mobility car retail
Rank In Industry:
4th In relations to Market Capitalisation. However, Vertu has very high growth records and aspirations. This movement upwards from this position is a definite consideration.
Self funded growth:
*Shareholders funds = £238 Million *Freehold&leasehold property portfolio = £188Million – valued at historical cost less accumulated depreciated and impairments. Potentially understated property portfolio. *Net Borrowings = £19 Million *Retained Earnings = £64 Million
New revenue streams:
- Bristol Street Versa Mobility solutions – wheelchair accessible vehicles sector.
- Taxi center – New&used taxi vehicles for hire.
- What car? – Online portal for selling new vehicles on private contract.
- Lease car direct – Vehicle sales on attractable finance deals. (Vertu have stated that serious future investment will occur in this sector.)
- Ace Parts – Vehicle parts business selling parts to retail & independent garages online.
Light commercial Vehicle market:
- Comprising of vans, which will increase in demand due to increases in online retail shopping leading to higher demand for delivery vans.
Manufacturing Franchising Policy:
- Trimming UK dealership numbers, providing operational gearing benefits to the remaining retail outlets.
Strong cash conversion:
- Vertu has a cash conversion of £65 Million in operating net cash flow from an adjusted operating profit of £28 Million. This alongside a normalised cash balance of £20 Million will allow for future turnaround acquisitions.
4. Price to Valuation
From computing a net assets valuation along with a future free cash flow and a earnings valuation model on Vertu Motors Plc. Discounting back to today’s present value using a 7% discount rate to be Intrinsically valued between £0.64p – £0.90p per share. Which is £238 Million – £336 Million for the entire company. The estimated future growth of the industry was taken into consideration in such valuation.
* Based on a current market price of £0.43p per share.
*Price/Earnings = 7 *Price/Book value = 0.6 *Price/TangibleBV = 1.1 *Price/Sales = 0.1 *Acquirers multiple = 5 = 20% operating earnings return
As you can see Vertu Motors is a very promising and cheap business operating in a consolidating industry.
I hope you enjoyed the company analysis, all feedback is welcome.
Thank you very much for reading 🙂
Jordonlee W. Smith