This extended update into Vertu Motors dives deeper into the valuation calculation along with recent activity from the company.
- Averaged 16% per annum growth in revenue. 2008-16.
- Averaged 13% per annum growth in E.P.S. 2008-16.
- Averaged 17% per annum growth in total units sold. 2012-16.
Return on tangible capital employed
Vertu Motors operating within the Auto & truck dealership industry is prone to many capital expenditures and leases on dealership property. Nonetheless, the company still operates with an acceptable ROTCE of 16%.
Enterprise Value / E.B.I.T
An EV / E.B.I.T of 7.3x is certainly a fair premium price and boarder-line cheap for this operation, especially considering the acceptable ROTCE of 16% and the consistently strong free cash flow generation.
Price / Earnings – Price / Book value
With normalised P/E and P/BV of 8.4x and 0.89x respectively, Vertu motors is certainly peaking on the side of cheap. An investment at these premiums to earnings and discount to book value provides a wave of safety against paying too much for this operation, especially in today’s market levels.
Vertu’s Valuation “DCF”
Vertu Motors valuation remains the same and calculated using a discounted future free cash flow model. The model imposes an Indicated intrinsic valuation of Vertu motors at today’s present value to be £ 0.90 per share, equating to £ 355 Million for the entire company.
The discounted cash flow valuation (referred to as “DCF”) uses Vertu’s average free cash flow over the previous 10 years. A growth rate of 5.6% was then applied to estimate the next 10 years rate of growth. This is a conservatively estimated growth rate based on the expected growth for the entire industry (Although it is likely Vertu will grow faster then its industry). Finally, a 7% discount rate to present value was applied. This discount rate considers:
- Dividend record
- Capital structure
- Long-term prospects
- Historic management performance
- Risk free rate (10 year government gilt)
- Opportunity cost rate (FTSE 100 earnings yield)
Why use a DCF model ? Explained in Berkshire Hathaway’s 1992 Annual letter (under common stock investments subtitle).
Using estimated future growth rates from Vertu’s historic E.P.S average compounded rate of 13% and the estimated growth rate of the entire industry of 5.6%, we can estimate how long a waiting period an investor today would require patience for to reach Vertu’s Indicated intrinsic valuation (excluding shares repurchases or major dividend changes).
Between 2012-2016, Vertu Motors recognised an average growth in revenue by 22%. During the same 4 year period, recognised average growth of 17% in total units sold. This disparity could be argued that over the past 4 years, Vertu has been able to raise selling prices by 5% on average. This rate is superior to the rise in inflation over the same period and therefore can suggest some degree of market power, with support from alternative service related (after sales) revenue streams. Nonetheless, this is a positive sign.
Vertu’s board has reported it is confident that a significant decline in capital expenditures will be reported by FY 2019. As completion of the Jaguar Land Rover dealerships will see reductions in required capital expenditures. This would also see an increase in the ROTCE and the free cash flow generation of the company. Interim report
Vertu Motors remains committed to its organic growth strategy of acquiring distressed and consolidating dealerships across the UK and turning them into profitable franchises.
Most recently (2016 Interim report) Vertu purchased 11 new dealerships ranging from Mercedes Benz’s to Honda. These purchases and others have added significant long-term growth potential to the company and brings total dealerships to 129.
After-sales services still remains the company’s highest gross margin product and increasingly contributes to rises in revenue. All segments of the company increased in volume sales, expect for new cars, which Vertu and the Auto industry expects to see a slight decline in new car resignations in 2017. Nonetheless, the prospects for Vertu Motors remains balanced and continued performance will ensure this company provides an excellent return over time.
Thank you for reading,
Jordonlee W. Smith