VTU.L - Vertu Motors

[kab60]

Update from Vertu out, looking fine - waivers granted as expected, 30m in cash: https://m.londonstockexchange.com/exchange/mobile/news/detail/14531469.html

[compounding]

Forrester buying shares at two separate occasions recently:

 

June 3: https://investors.vertumotors.com/pdf/news/9551mjrfddcc/03062020-notification-of-directors-interests.pdf

 

July 20: https://investors.vertumotors.com/pdf/news/9656vxltfjol/20072020-directorpmdr-shareholding.pdf

[kab60]

Small amounts... but cost savings of 10m is significant on 84m marketcap... It is cheap, but I like Cambria better due to higher ROE, better acquisitions and massive insider ownership...  seems less complicated. My fear is Vertu does a large acquisition and overpays... on the other hand, if they can take out 10m in cost, ROE will start trending in the right direction... but with no large difference in valuation, Cambria just serms like the more certain pick

[compounding]

Small amounts... but cost savings of 10m is significant on 84m marketcap... It is cheap, but I like Cambria better due to higher ROE, better acquisitions and massive insider ownership...  seems less complicated. My fear is Vertu does a large acquisition and overpays... on the other hand, if they can take out 10m in cost, ROE will start trending in the right direction... but with no large difference in valuation, Cambria just serms like the more certain pick

 

Why do you think Vertu will make a large acquisition and overpay?

[Ballinvarosig Investors]

Why do you think Vertu will make a large acquisition and overpay?

 

Forrester did allude to it in June.

well-positioned to take advantage of the opportunities which will arise

 

With that said though, I would be absolutely shocked if they did any acquisitions this year, and even after that, I would be surprised if they did any deals in size. The banks are going to be extremely wary about financing any deal, also Vertu themselves will need to keep a decent cash position. I suppose they could consider a discounted rights issue, but at the current share price, I doubt this shareholder base would allow.

 

My guess is that until the situation stabilises and we see something close to normality return to the car market with the losses being plugged, there won't be deals.

[kab60]

Small amounts... but cost savings of 10m is significant on 84m marketcap... It is cheap, but I like Cambria better due to higher ROE, better acquisitions and massive insider ownership...  seems less complicated. My fear is Vertu does a large acquisition and overpays... on the other hand, if they can take out 10m in cost, ROE will start trending in the right direction... but with no large difference in valuation, Cambria just serms like the more certain pick

 

Why do you think Vertu will make a large acquisition and overpay?

Can't remember exact quote, but they expect there will be opportunities for consolidation. They believe it's a scale game and that consolidation will, I assume, improve returns. But looking at Cambria and Asbury it seems that the more important thing is having the right mix of franchises, execution and capital allocation. I think Vertu will do fine at these levels, but why pick it over Cambria? They just seem to be in a better spot and better managed, and valuation isn't very different.

[chompsterama]

Cambria and Vertu don't exactly represent the same business.  Cambria has Lamborghini, McLaren, Rolls, Bently, Aston.  Vertu sells to everyone else. 

 

Assuming one does not have institutional constraints (which you probably don't if you are looking at microcaps), it seems only two questions really need to be answered to warrant an investment in Vertu at half of TBV and 3x earnings. 

 

1. Will car dealers go the way of newspapers?

 

Historical journalism and its role in getting you the news via newspapers were a little bit of a bait and switch whereby they were funded by the advertisers. As soon as those advertisers found a more effective medium, they ditched journalism and the whole thing fell apart. That could happen with car dealers. Having a third party dealer is not likely the most efficient way for a manufacturer to sell a car - see CVNA's market cap if you have any doubts. If a more effective and efficient medium comes about OR is more widely adopted by manufacturers OR consumers, then car dealers might go the path of local newspapers.

 

2. Will Vertu's management team dilute me? 

 

At this price, I don't think much else really matters. 

 

 

[compounding]

I don't really want to make this into a Vertu vs Cambria-discussion, as I think Cambria will likely do well too. But here's why I like Vertu better than Cambria:

 

1. Scale. Over time I think scale benefits will accrue to the larger players in this industry via 1) better margins 2) lower financing costs 3) larger balance sheets that will enable more inorganic growth and technology investment. Vertu is almost 5x larger than Cambria.

 

2. ROE improvement opportunity. There seems to be to be an opportunity to 1) increase margins 2) increase inventory turns 3) increase leverage which could all lead to higher ROEs in the future. They have historically acquired turnaround cases with improvement plans. You could argue the delta in financial performance is because Vertu are inferior operators, but I haven't seen any evidence to support that case. On the contrary, they improved ROICs/ROEs according to plan up until Brexit/Corona hit.

 

3. Better capital allocation and more opportunity to create value via capital allocation going forward. Post 2016 Vertu has engaged in multiple value enhancing activities like buying back stock cheaply, freeing up capital via sale/leaseback transactions, and making selective acquisitions. Cambria has bought back zero shares, made zero acquisitions, spent a lot on capex and paid a small dividend. Cambria has £78.4m in freehold properties that they are increasing their investments in -- Vertu has £212m.

 

4. FCF generation and balance sheet. Cambria generated negative FCF between 2017-20. Vertu generated £75m in FCF in the same period and have guided to declining capex going forward. Cambria has a slight net debt position -- Vertu has a net cash position and an overfunded pension.

 

As for dilution or expensive acquisitions, the last 3-4 years they have bought back stock and refrained from buying as many companies as they preferred because prices have been too high. I.e. they correctly identified that their own stock was the better buy. Do you expect the CEO to buy in the open market if they are planning a highly dilutive equity issuance, after the worst storm has passed? I guess everything could potentially happen but it just seems unlikely to me.

 

Similarly for acquisitions, why would they suddenly change their attitude after being disciplined for years executing a stock buyback instead? I would expect there to be more acquisition opportunities post-covid, but in many other markets transaction volumes have gone down because of the large bid/ask spread between buyers wanting an uncertainty discount and sellers being willing to hold the risk and wait for a fair price. It wouldn't surprise me if the same were true in automotive dealerships.

 

In summation I think this is a cheap stock where the management/board are making good capital allocation decisions and where there is plenty of potential for value creation. There's plenty I'm not super excited about with this company too, which is why it's a small position for me, but at this price I think it's worth holding. Happy to hear any contrary thoughts.

[samwise]

 

1. Will car dealers go the way of newspapers?

 

Historical journalism and its role in getting you the news via newspapers were a little bit of a bait and switch whereby they were funded by the advertisers. As soon as those advertisers found a more effective medium, they ditched journalism and the whole thing fell apart. That could happen with car dealers. Having a third party dealer is not likely the most efficient way for a manufacturer to sell a car - see CVNA's market cap if you have any doubts. If a more effective and efficient medium comes about OR is more widely adopted by manufacturers OR consumers, then car dealers might go the path of local newspapers.

 

 

I'd replace this with: Will car owners still go to dealers for buying new and old cars, and then for the next 5 years for service and parts?

 

CVNA only competes on one of these (older cars). The highest margin is in service and parts and it should remain, specially for newer cars and the luxury segment. (I don't see many Lamborghinis at Jiffy Lube).

 

Selling new cars is an experience, where again there may be more value for higher end manufacturers. (Genesis insisted on a physical separation of the showroom from the Hyundai dealerships when they launched. Eventually they went without showrooms and offered home delivery, bringing the car to your home for test drives etc. But all done by the dealership. Tesla decided to use their own mall showrooms, although I don't know where that stands now.). Cheaper brand cars could migrate to a cheaper distribution, if one is found.

 

Selling used cars is all about turnover and smart buying, selling. Dealerships are at a disadvantage usually. Only Cambria seems to have succeeded in this market.

 

Also UK dealerships get cancelled by the manufacturers. There isn't a legal protection like in the USA, so they will always be valued lower.

[kab60]

I don't really want to make this into a Vertu vs Cambria-discussion, as I think Cambria will likely do well too. But here's why I like Vertu better than Cambria:

 

1. Scale. Over time I think scale benefits will accrue to the larger players in this industry via 1) better margins 2) lower financing costs 3) larger balance sheets that will enable more inorganic growth and technology investment. Vertu is almost 5x larger than Cambria.

 

2. ROE improvement opportunity. There seems to be to be an opportunity to 1) increase margins 2) increase inventory turns 3) increase leverage which could all lead to higher ROEs in the future. They have historically acquired turnaround cases with improvement plans. You could argue the delta in financial performance is because Vertu are inferior operators, but I haven't seen any evidence to support that case. On the contrary, they improved ROICs/ROEs according to plan up until Brexit/Corona hit.

 

3. Better capital allocation and more opportunity to create value via capital allocation going forward. Post 2016 Vertu has engaged in multiple value enhancing activities like buying back stock cheaply, freeing up capital via sale/leaseback transactions, and making selective acquisitions. Cambria has bought back zero shares, made zero acquisitions, spent a lot on capex and paid a small dividend. Cambria has £78.4m in freehold properties that they are increasing their investments in -- Vertu has £212m.

 

4. FCF generation and balance sheet. Cambria generated negative FCF between 2017-20. Vertu generated £75m in FCF in the same period and have guided to declining capex going forward. Cambria has a slight net debt position -- Vertu has a net cash position and an overfunded pension.

 

As for dilution or expensive acquisitions, the last 3-4 years they have bought back stock and refrained from buying as many companies as they preferred because prices have been too high. I.e. they correctly identified that their own stock was the better buy. Do you expect the CEO to buy in the open market if they are planning a highly dilutive equity issuance, after the worst storm has passed? I guess everything could potentially happen but it just seems unlikely to me.

 

Similarly for acquisitions, why would they suddenly change their attitude after being disciplined for years executing a stock buyback instead? I would expect there to be more acquisition opportunities post-covid, but in many other markets transaction volumes have gone down because of the large bid/ask spread between buyers wanting an uncertainty discount and sellers being willing to hold the risk and wait for a fair price. It wouldn't surprise me if the same were true in automotive dealerships.

 

In summation I think this is a cheap stock where the management/board are making good capital allocation decisions and where there is plenty of potential for value creation. There's plenty I'm not super excited about with this company too, which is why it's a small position for me, but at this price I think it's worth holding. Happy to hear any contrary thoughts.

Much appreciated, thanks for the input. Just a little pushback from here;

 

1/2) Scale advantages and ROE improvement makes sense intuitively, but what we know works today is higher end and luxury cars. Asbury in the US is another example of that. They are far from the biggest dealer but they're the most profitable with the highest returns. So I see your point, but I'm not sure how certain it is to be true, nor whether they can execute. It will be very interesting to see if they capture 10m of savings that drops to the bottom line - or they "reinvest"...

 

3) As long as Cambria earns DD returns I'm all for reinvesting every penny. It is so illiquid that buybacks probably doesn't make sense. They bought a luxury dealership in January, once again without paying goodwill.

 

4) Debt position is neglible both places, reason why Vertu has net cash is because they sold down their inventory, so that'll reverse.

 

I think consolidation is in the cards, but I agree it is probably not right around the corner. And hopefully they can do a cash deal if they build up a warchest, since the stock is a very weak currency. The recent share buys were very minor, and he "only" owns 2 pct of the Company, so I'm not convinced they won't do something stupid. To sum it up, I very much agree it is a good bet here and feel it is difficult to lose long term unless they really botch a major acquisition, and if they can increase margins and ROE, it'll potentially be a windfall. Just seems like Cambria is in a much better spot and less have to go right while valuation is about the same.

 

 

 

 

[cmlber]

Better capital allocation and more opportunity to create value via capital allocation going forward. Post 2016 Vertu has engaged in multiple value enhancing activities like buying back stock cheaply, freeing up capital via sale/leaseback transactions, and making selective acquisitions. Cambria has bought back zero shares, made zero acquisitions, spent a lot on capex and paid a small dividend. Cambria has £78.4m in freehold properties that they are increasing their investments in -- Vertu has £212m

 

Vertu and Cambria both formed in 2006 by current mgmt.  Cambria shares up 420% since then, Vertu shares DOWN 62% since then.  That’s all you need to know imo.  I don’t trust roll ups that destroy 62% of your capital over a 14 year period to allocate capital well in the future...

[compounding]

Thanks for the feedback guys, we'll see what the future holds.

[kab60]

Strong trading update, now at a profit for the whole year. While I much prefer Cambria, both are just too cheap.

 

I mean, Vertu did 7,4m PBT in July - thus trading at 10xJuly earnings. :D

 

However, it seems like acquisitions are coming. They better have a really high hurdle rate considering they themselves trade below 0,5xTBV, but I have my doubts.

 

From the trading update:

 

The Board’s ambition is to grow the scale of the Group’s franchised  dealership  operations  centred around key  manufacturer  partnershipsand investment in the Group’s four major retailing brands, Bristol  Street Motors,  Farnell,  Macklin  Motors  and  Vertu  Motors. Several growth  opportunities are currently  being  evaluated in  terms  of  acquisitions  against  investment  criteria  used  to  ensure shareholder value is created and we would expect progress in our ambitions in the months ahead.

[kab60]

Forrester handing out Breitling watches like there's no tomorrow!

 

That seems pretty dumb

[whistlerbumps]

Good interview with RF here.

 

https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/car-dealers-must-become-technology-companies-an-interview-with-the-ceo-of-vertu-motors?cid=other-soc-twi-mip-mck-oth---&sid=3778829180&linkId=100680268#

[kab60]

 

How are people thinking about a ban on petrol cars in the UK? The original plan was to ban them in 2030. Then that moved forward to 2035. Now it seems like it'll be 2030. Considering Vertu - and Cambria - get 40 pct. of GP from service and maintenance it might be a large hit down the road. I know Packer, who runs Bonnhoeffer Fund, has looked at data in Norway where it seems like EV's won't decrease the need for maintenance. But I also see stats, and hear anecdotally, maintenance dropping something like 70 pct. on EV's.

 

Before the GFC, car dealers were very dependant on new car sales. After the GFC, the model shifted towards maintenance and service - making dealerships more resilent and arguably deserving a much higher multiple (which they haven't gotten).

 

With online sales increasing etc. it's hard to envision a future where profits on sales of new cars increase, so how are people thinking about the possible changes and what it means for these businesses' terminal values?

 

[ukvalueinvestment]

I think this is so far down the line as to be irrelevant.  The thing is trading on a PE of, what, 8?  ie very little terminal value ascribed.  In ten years time, the installed base for non EV cars will still be huge.  From here you probably have a 30 year tail of petrol/diesel car maintenance and of Course EVs need (less) maintenance as well.

[Spekulatius]

I don’t think maintenance for EV’s will be lower. What is the difference between EV’s  and ICE’s, the drive train (motor and transmission). Sure there are different issues (no oil change, spark plugs, transmission fluid changes), but even electric motors can have issues and there are friction parts in both.

 

Most issues are nowadays with the electric or electronic system as we have more Motors, sensors etc. Soon we are going to have more cameras, IR & LIDAR systems, computers, software etc for thr self driving cars. I think the character of vehicle maintenance will change dramatically, but I am not sure the cost will go down.

 

Accident frequency will probably go down, but the cost to repair those complex systems will be higher, so it may be a wash.

[kab60]

I think this is so far down the line as to be irrelevant.  The thing is trading on a PE of, what, 8?  ie very little terminal value ascribed.  In ten years time, the installed base for non EV cars will still be huge.  From here you probably have a 30 year tail of petrol/diesel car maintenance and of Course EVs need (less) maintenance as well.

Thanks for the input. I think it's trading for even less normalized, but I'm not sure it's irrelevant. It might be at the current levels, but if people think of it as a melting ice cube down the line that would depress ones exit multiple, so I think it's reasonable to think about. I assume it's also one of the reasons that the dealerships are quiet furious about the proposed legislation. Considering both Cambria and Vertu invest heavily you don't wanna end up stranded assets (I'm not saying that'll happen - the dirt itself is valuable). There'll obviously be a tail of maintenance, but not sure most of that longer down the line will accrue to volume dealerships like Vertu. Perhaps it's easier for Cambria, with their focus on premium and luxury, to keep service on their books after the initial warranty has ended.

[kab60]

I don’t think maintenance for EV’s will be lower. What is the difference between EV’s  and ICE’s, the drive train (motor and transmission). Sure there are different issues (no oil change, spark plugs, transmission fluid changes), but even electric motors can have issues and there are friction parts in both.

 

Most issues are nowadays with the electric or electronic system as we have more Motors, sensors etc. Soon we are going to have more cameras, IR & LIDAR systems, computers, software etc for thr self driving cars. I think the character of vehicle maintenance will change dramatically, but I am not sure the cost will go down.

 

Accident frequency will probably go down, but the cost to repair those complex systems will be higher, so it may be a wash.

Yeah, I don't think smash repair shops will have less work cut out for them. Tons of stuff to repair in newer cars.

 

But general maintenance might go down unless we're talking about tire shops (which might actually have more to do since EV's chew through tires faster than ICE cars): https://techcrunch.com/2020/03/06/electric-vehicles-are-changing-the-future-of-auto-maintenance/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAL19LVvYoLKCQGNZdrk0_axxJryWlyaCVggPH-eRXwrEfFVP1D6WciHBj85N2dMvYZr24-yyZSaDdvAxcDa2FKS5hbD_BnjrxG8cz4i0vglS2Kg6ZbyT4XOtn3zY34ZkLhbs8tMMxre3Cv6s23TbmBVc4DXNOPaR1DGU_roPKX_I

 

On the other hand, as vehicles become more advanced, you'd think authorized dealerships would be advantaged since things are getting more complicated.

[Ballinvarosig Investors]

On the other hand, as vehicles become more advanced, you'd think authorized dealerships would be advantaged since things are getting more complicated.

I was actually thinking this myself.

 

I get my car repaired/serviced exclusively at a local independent mechanic (like most people in the UK). Generally most of the stuff that he's fixing is standard and reasonably priced (clutches, timing belts, suspensions, etc.). Increasingly though he's seeing lots more problems with electronics and computers. Sometimes he simply cannot fix it, or else his solution is to swap out the whole part. Some of the pricing on these components before labour is little more than extortionate (multiples of let's say a standard timing belt change). Particularly in the high-end market, the manufacturers make things deliberately expensive and convoluted to be fixed, presumably with the idea that they're going to make money on the repairs. A move to EV's might actually complicate the process of repairing cars and force more people into dealers.

 

My best guess is that while the mix of parts/repairs might change, the overall cost will probably remain about the same. This sort of business is a profit centre for the manufacturers and I don't see any reason why they are going to want to throw this away. Tesla is obviously the outlier in all this, some of those folks claim repairs/servicing is cheaper. I am sceptical of the claim (I've seen some out of warranty repair costs that looks nuts), but I don't know enough to make a claim one way or the other. Over all, I am not worried about Tesla, they are like 0.5% of the total car market. Let's say they execute well over the next 5 years with Berlin and China both being a huge success, that gets them to what, 1.5-2% of the market?

 

I think Vertu will do ok, but I think we'll need to be prepared to hold for the long-term as I don't think it's going to become apparent anytime soon that they can co-exist with the likes of Tesla (assuming Tesla can do the business).

[kab60]

Results out, shows how resilent these dealerships are. Generated 80m cash from ops on what was a 60m marketcap not very long ago. Will obviously have to replenish inventory, but it's still quiet impressive. This crisis might have been good for them in that they've taken a lot of cost out, hopefully setting them up for a structurally more profitable future.

 

 

    Group well positioned ahead of COVID period with stable experienced management, strong balance sheet and in house technological innovation strategy

    The Group executed strongly during this unprecedented period:

        Adjusted[1] profit before tax of £4.7m delivered in H1 - no exceptional items

        Proactive communication and support for Colleagues during lockdown created momentum

        Excellent cash generation with operating cashflow of £80.0m

        Strong balance sheet with net cash[2] of £36.5m and tangible net assets per share of 46.5p

        Cost reduction programme completed, delivering anticipated annual savings of £10m

    Increasing use of innovative technology capability:

        Omni-channel retail enhancements deployed with good customer uptake levels

        Automation tools implemented to improve process efficiency, aided delivery of cost reduction programme

    Balanced capital allocation approach:

        Acquisitions subject to investment hurdle rates

        Dividends anticipated to return in next financial year dependant on financial performance

 

[kab60]

Upbeat article on UK car market: https://www.autocar.co.uk/car-news/industry/analysis-why-uk-car-market-healthier-it-looks

 

Vertu CEO has been very openly bullish and the market has noter, stock almost doubled since the bottom. Cambria, which I prefer, on the other hand sounded more cautious when they last updated the market, but that is some time ago. I think we could be in for a pleasant surprise there.

[compounding]

In talks to acquire a couple of BMW dealerships: https://cardealermagazine.co.uk/publish/inchcape-is-believed-to-be-selling-all-its-bmw-dealers-as-vertu-and-jardine-look-to-carve-up-portfolio/206043

 

The company confirmed they are in negotiations and that payment will be in cash.

[samwise]

Seems there isnt a separate thread for Cambria, so posting here.

 

MBO possible at 80, 2019 earnings were 10 cents, so 8x P/E, minimal debt.

Price peaked at ~86 in Jan 2016. Holders since then might barely breakeven after dividends.

 

This has go to be one of the risks in a any thesis. Company might be bad, and creditors get the returns, not you. Company might be good, and management gets the returns, not you.

 

Luckily I bought most of my position in the last couple of years, with the majority last year. But I would have liked to own long term.