VTU.L - Vertu Motors

[kab60]

They're on their way to do 20m of ebitda. Net debt is 6m. A business like this could easily handle 2-3 turns of ebitda, so they can basically finance the takeover by putting the right amount of debt on the biz (management owns 40 pct. already). And that's without factoring in the value of their real estate, which they could also monetize in sale-leaseback transactions.

 

It was a 10 pct. position for me, and I bought more on the news. I have fair value closer to 2x the offer, and I could easily see a competing bid come in. Their balance sheets makes it very easy to finance a deal, and they're trading at sub 4xEBITDA.

 

Managements offer is just around book value despite this being the best-in-class listed franchise-dealer with a lot of headwinds about to lift. There's no way I'm tendering my shares at 80/pence, and a lot of value shops aren't gonna do so either. Bossert, Olesen, Symmetry and Bonhoeffer are all long and have a much higher fair value range, I'm sure. Not sure on the take-over code, but it seems they need 90 pct. of the shares to do a squeeze-out, and the above funds probably aren't too far off 10 pct in total.

 

I'm disappointed in management, and the timing is really something. Covid19 is about to lift, there's a lot of pent up demand, consumers are healthy and brexit is a thing of the past. I think this will be a winner going forward and hope a proposed deal falls through. But I think it's perhaps also a bit risky of management, since they've shown their hands and other parties might join in on the fun considering what a steal it is.

[Anglozurich]

That is disappointing from management. Especially for shareholders who have stayed with the company during a tough time for franchise dealers with more physical presence. Why now! I am not in this but still poor form.

 

Speaking to people in the industry, the durability of service/after sales income for franchise dealers is no sure thing in the long term. I still think Motorpoint is a much better business than any of the franchise names including Vertu. The U.K. car dealer and independent market is a busy space. I am hoping Cazoo files for IPO. It would do ‘MOTR a favour in terms of showing the ocean between them regarding unit sales and free cash flow.

 

Where do you guys see the customer journey going? Omni channel or do you think people will increasingly buy cars (used and new) 100% online?

[samwise]

 

Managements offer is just around book value despite this being the best-in-class listed franchise-dealer with a lot of headwinds about to lift. There's no way I'm tendering my shares at 80/pence, and a lot of value shops aren't gonna do so either. Bossert, Olesen, Symmetry and Bonhoeffer are all long and have a much higher fair value range, I'm sure. Not sure on the take-over code, but it seems they need 90 pct. of the shares to do a squeeze-out, and the above funds probably aren't too far off 10 pct in total.

 

.... But I think it's perhaps also a bit risky of management, since they've shown their hands and other parties might join in on the fun considering what a steal it is.

 

Interesting, yes maybe there could be a value bump. I've got my popcorn and I won't tender either. Wouldn't mind being the leftover 11% shares in an illiquid stock (see Schuff). Management has rarely paid goodwill, so not sure they start now. Their discipline is part of the value.

 

I do not think a competing offer is possible.

1. management own 40%, so no one can really win against them.

2. The value is in management, not the business itself. So what would be the point of buying them out.

 

Aim could become one of the private parties as they did with 100HK, but I don't think this trades enough.But most public investors would not be able to do that.

[kab60]

I agree management is key, but I wouldn't underestimate someone like Robert Forrester thinking he could do just as good a job. Or any of the other players for that matter. Vertu have been very clear that they wanna consolidate, and here's an unlevered gem that's easy to finance. He hasnt hesitated to issue equity in the past either.

 

Yes, management owns 40 pct., but if there's a significantly higher bid, how would it reflect on them if they just dismissed it? I can't help wonder if Lavery wants to exit and this is his way of drumming up interest, but sure, that's probably unlikely.

[samwise]

AngloZurich: On the future of car retailing: https://www.motortrader.com/motor-trader-news/automotive-news/genesis-to-sell-cars-online-and-studios-no-dealer-input-05-05-2021

 

Decent report from CAMB: almost 16% ROE, and they are trying o buy it at book. I saw some articles speculating on other dealers considering bidding on it, but can't find those now.

http://www.cambriaautomobilesplc.com/resources/Interim_Results_2021_statement-Final.pdf

 

[Anglozurich]

Thanks @samwisefor the article. The dealer model seems to have been resilient over the decades because they’ve proved to be local businesses. I have no insight on manufacturers going direct to consumer and how likely it is to succeed. People are saying all sorts of things about how car retailing will change. Some of it is interesting to me and some is just zero interest policy and COVID~extrapolation leaking into the sector. Cazoo valuation being an extreme example. Carvana the same. If I shorted companies they would be in the book.

 

Cambria is performing nicely and yes management seem to have stolen it. I don’t own as I don’t like being at the luxury end of the spectrum with dealers. With Motorpoint, I am giving up services revenue for much better unit economics on used car sales, higher roe, cookie cutter / optimum processes across all sites and good capital allocation relative to many of the dealer groups. I think motorpoints ev/ forward fcf is also cheap. 
 

 

Edited May 5, 2021 by Anglozurich

[manuelbean]

Hi guys, I know that this is Vertu's thread, but I believe this data (of Cambria) to be of interest to shareholders in both. I'm planning on getting the same data for Vertu and I'll post it here when I do.

 

The thing is, I hear people talk about how the Premium/Luxury segment supports higher margins, but I don't see that happening. The gross margin for new cars for Cambria has been steady since the IPO at around 7%. 

Yes, the revenue per new vehicle has been going up (these cars sure seem cheap) ...

...as has the profit per new vehicle...

...and by the way, this has happened with the "used vehicles" too.

But the margin has remained flat!

 

My best guess as to why this is happening is that, although Mclarens and Lambos and whatnot are higher ticket items, the OEM's make it so that the dealers always get the same margins (although these margins represent higher amount of £ for the dealer).

This theory works well for new cars, but I haven't yet figured out why the same is happening with used cars.

Thoughts?

 

 

 

 

Edited May 26, 2021 by manuelbean

[Anglozurich]

The manufacturers do have an impact on profitability of franchisers but more importantly they constrain return on capital. That is why franchised dealers in the UK can never be a great business and hence why they will never trade at multiples investors believe they will trade at. I am less knowledgeable on the US market. The CEO of Marshall Motors (Daksh Gupta) is a high quality operator and well respected in the industry within the UK. He speaks with younger and ambitious CEO's of franchised dealerships as a mentor....i will try and find the source but he simply tells them .....they will not be able to consistently generate more than 1%-1.5% net income margin over time as a franchised operation. He advises CEOs to budget for this as hes been around longer enough to know what they will end up with. Cambria are an exception but when you look look back at Vertu, Lookers, Pendragon and average out....his claim stacks up. You may say "yeah but low margin is fine" but on the capex side, SG&A and financing arrangements - this is what screws the ROE equation over time and the total capital intensity will always be directly or indirectly imposed by the manufacturers either through the balance sheet or P&L.

Motorpoint Group Plc (used car supermarkets) is simply a much better business than the franchised models. The unit economics are significantly better...they can forgo service revenue but achieve double / sometimes treble the stock turns on a much bigger site with fixed costs and SG&A spread across more cars. The denominator is such that they are asset-light and not at the mercy of the manufacturers - low capex per new site and even lower for online sales and lower SG&A. This means more free cash flow at the bottom. Floorplan financing for newer cars (less than 3 years old) sold to prime customers is also growing in the UK and this plays into their hands. This becomes an advantageous cycle..the free cash flow can be reinvested into 1) new physical stores with the same advantageous economics 2) bigger investment into online capability, online marketing and advertising where margins are even better. The industry is going digital and those resisting this fact will get killed over time 3) buybacks / dividends - MOTR are aggressive with buybacks which is very unique as a UK company and great to see.

I don't even think MOTR is expensive relative to other franchised dealerships and used car prices are simply on fire. I know some US hedge funds have bought into some of the UK franchised dealer groups citing discounts to US peers but i feel this is a weak argument. They will / have already re-rated but expecting multi-baggers for low return on equity businesses with increasing challenges re digital disruption / manufacturer-agency models is simply unrealistic. Motorpoint has a longer runway and the unit economics can be scaled. 

Edited May 26, 2021 by Anglozurich

[manuelbean]

Thanks Anglo. Lots of food for thought. I'm currently comparing Cambria, Vertu, Pendragon, and Lookers and I'll get to Motorpoint afterwards.

Some questions on ROE: Why is Cambria different from the others? Is it because it went after the luxury segment so they'll earn more bang (pounds) for their buck (Capex, SG&A, etc)?

On the SG&A and financing arrangements (not the Capex, that one I understand), how exactly do the OEM's interfere?

And what is your view on the agency model? How can it hinder/benefit the dealerships?

Cheers

 

Edited May 26, 2021 by manuelbean