VTU.L - Vertu Motors

[compounding]

Operating expenses decreased from 9.44% of revenues to 9.3%, that's what they talked about and what is in the income statement. If you compare the operating income adjusted for lease accounting instead of the ones with different treatment of lease expense the operating margin improved from 1.20% to 1.24%.

 

The ROE for Vertu was 9-11% in the years between 2015-18. Admittedly it has been on a downward trajectory since Brexit, but is that really shocking? The same has been true for the, in your words, franchise Cambria, which has lost a lot more (9%-points) on that metric.

 

The company's acquisition strategy has historically been weighted towards lower quality/margin improvement cases (shifted somewhat in recent years), which explains the lower margins historically. Also, their ROIC including goodwill has been in the similar 9-11% and was improving until the macro environment got worse. The discount to book is evidence that they have destroyed value? Why are we even discussing this if the market has all the answers? In addition to the data from the historical financials we can add the qualitative evidence described above that they are buying dealerships at 5x EBITDA a few years out. I have a hard time squaring that with the grade that they are destroying value. The equity raises on the other hand...

 

I agree that inventory turns ought to be an important metric, but I fail to see how dropping 0.2x in a Brexit/WLTP environment is a catastrophe. Since you seem to be focused on this metric, and are impressed by Cambria, are you similarly critical of them for not mentioning it in their half year report or the annual report?

 

 

 

 

[Packer16]

I think financing cost are important in the business & quoting margins before financing can be misleading.  Your margins are before financing costs.  I consider financing important as a shareholder you do not get any of that.  Now if Vertu comes up with cheaper financing it pre-financing earnings become IMO relevant.  You quote historical RoEs as though there is some reversion to the mean.  Vertu has primarily commodity/volume brands (88% vs. 50% for Cambia).  I think reversion to the mean will be harder in volume brands.  Cambria's RoEs by my calcs have declined from 19% to 14% while building out new dealerships.  The scale of Cambria is smaller than Virtu but the margins & turns are better.  Part of it may be geography (Cambria is focused on London & Manchester vs. nationwide for Vertu) & part the segments they focus on luxury vs. volume.  The fall in turns is not as important as the absolute level.  Like all retailers, the higher the turns the lower the profit margin you need to get the same RoE.

 

I think it is a mistake that Cambria did not mention it but in a commodity market (volume dealers) it is more important than luxury dealers where the margins are higher.

 

Packer

[whistlerbumps]

I think financing cost are important in the business & quoting margins before financing can be misleading....

Packer

 

I also think quoting income statement numbers without considering free cash flows can be misleading.  One reason why premium franchises have higher margins than volume is that they also have much higher capital requirements.  Thus I think the only true metric of value is levered FCF (as long as the balance sheet isn't a mess and VTU's isn't).  For what its worth,  VTU has a 19% FCF yield on 2021 numbers (25/131) and CAMB has only a 6% FCF yield (3.7/57.5).

 

Anyone who has spent anytime with Robert would agree that he is laser-focused on inventory.  That's why he has had significantly less pre-registrations over the past few years than PDG or LOOK (who are VTU's real comps given size/mix). 

[Packer16]

Interesting.  One difference over the next few years is Cambia is building out new facilities (which I am assuming VTU is not).  If we look at net income they are both about the same.  The inventory comment is interesting.  I wonder why are VTUs turns almost 70bp below Cambria despite having many more volume dealerships (83% vs. Cambria's 50%)?

 

Packer

[compounding]

Oh, I just assumed you referred to the EBIT-margin in your original post, so it made sense to keep using it. If you were talking about pretax margins, Cambria isn't really a 2% company, if we are going to continue with the comparison.

 

I also agree financing costs are important, but this is a company with net cash (excluding leases), that pays LIBOR + 1.3-2.1% for much of its debt. Since the leverage and the financing costs are quite low, I don't think this is one of the most important aspects of this particular business.

 

Well, I think it's likely that profitability expands from the latest figure, and used a few years more data to support that statement. I think the same is true for Cambria, with their 2018 ROE just below 13% (7271/56627), compared to the 15-22% range in the years prior. They posted a 22% ROE in 2016 (last pre-Brexit year), so that's where I derived the 9%-point drop from. Why do you think margins have a stronger mean reversion tendency in premium than in volume? Should be no difference in barriers to entry or negotiating position vs OEMs as far as I can tell. Do they have pricing power in some way vs the customer in ways that volume dealerships don't?

 

The economic advantages I see in this business are scale advantages; being able to spread fixed costs and best practices over more outlets, and a well known brand to drive traffic to the dealership and aftersales/service. The economic performance of Cambria suggests that local scale is at least enough, though.

 

It's good to know that Forrester is focused on inventory, but I would tend to agree with Packer that you want to see it communicated (and perhaps tied to comp), and you want to see it realized in the numbers.

 

Vertu had a capex program the last few years that tails off about now, so FCF should increase from this year onward, according to management.

 

[whistlerbumps]

Interesting.  One difference over the next few years is Cambia is building out new facilities (which I am assuming VTU is not).  If we look at net income they are both about the same.  The inventory comment is interesting.  I wonder why are VTUs turns almost 70bp below Cambria despite having many more volume dealerships (83% vs. Cambria's 50%)?

 

Packer

 

VTU FY 2020 capex includes 10mln of capacity increases, 3mln of new dealership build, and 1.4mln purchase of new property so there is still some growth in that FCF number.  How much is Cambria investing in new dealerships?

[kab60]

These levels are silly. Bought more. 66m marketcap, 29m net cash. Around 1/3 of tangible book value. Generated 15m FCF H1 2019. 1,6xev/ebitda 2020 (sure, earnings might come down. But really, who cares). Some plus 40 pct of GP is from service. Capex down after large investment cycle. Some competitors are in distress, these guys can pick and choose what they like. Not a fabolous business but pretty decent considering all the uncertainty Brexit cased and how results held up. 9 pct dividend for those who care.

[Saj]

Agreed.  I made it a full position at these prices

[samwise]

Since I couldn’t find a thread for Cambria, i’m posting here. Both are extremely cheap now but I’ll focus on Cambria below. It is cheap on trailing numbers (28% earnings yield ) but not sure if its deserved. Sure car sales will be zero next quarter, but people (survivors) will buy cars eventually, and eventually in similar numbers. Only question in my mind is, will these businesses survive without diluting shareholders, or taking on massive debt like carnival cruise?

 

Do both VTU and CAMB make it if their dealerships are closed for a few months? Only essential repairs are open, Cambria cancelled their dividend and capex, probably laid off people. I assume very limited cash spend on these operations. But rent utilities and interest charges will remain.

 

They had cash>26 million £ at last report and the IFRS 16 note had lease liabilities of ~8.4 million. Interest paid last year was 0.84M (seems to be floorplan financing charges only, the bank interest charges are non-cash and lump sum?). The acquisitions they did after the report seem pretty cheap (~2M max).

 

So they seem to have enough cash, and are conserving cash by reasonable actions(dividend, capex). No reason they shouldn’t survive. Then why are they so low? What am I missing?

 

https://www.reuters.com/article/brief-cambria-automobiles-announces-temp/brief-cambria-automobiles-announces-temporary-closure-of-its-dealerships-across-uk-idUSFWN2BH0AR

 

PS: Are you concerned about the horrible glassdoor reviews?

https://www.glassdoor.co.uk/Reviews/Cambria-Automobiles-Reviews-E703367.htm

 

[kab60]

I'm invested in both Companies. Anyone thinking of taking a position here - or understanding how tough the situation is - should listen to this interview with Vertu's CEO: https://cardealermagazine.co.uk/publish/vertu-motors-boss-robert-forrester-car-dealer-live-midday-tuesday/189057

 

It's gonna be some extremely tough months for both Companies, but both have pristine balance sheets, and I think they'll get to the other side without dilution. Hopefully they'll come out stronger on the other side and will be able to take advantage of the situation, because a lot of dealerships probably won't be able to make it through. I can also recommend following Robert Forrester on Twitter (Vertu CEO) for some "live updates":

 

 

Robert Forrester@vertumotors

23h

Yesterday our central teams working from home in the North East took over 1500 phone calls, made 1888 key worker, vehicle service bookings and handled over 200 internet sales enquiries.

[JayGatsby]

Seems like one of those companies that should liquidate in a recession. Would be doing shareholders a favor.

[ukvalueinvestment]

I don't agree.  As a cyclical company, where the current assets are funded by debt, you would expect it to trade below book value at certain times, like a deep recession.  Assuming it can long term returns at or over the cost of capital, which has been the case previously, the only investor it would benefit is the one who has just bought it as a cigar butt.  The long term owner may not agree.

 

Anyway, in the real world, companies don't just liquidate as soon as they trade below book in a recession.

[kab60]

Seems like one of those companies that should liquidate in a recession. Would be doing shareholders a favor.

That doesn't really make any sense in real life. You'd want them to dump their inventory of used cars in a market with no buyers? And sell their freehold assets to whom exactly? They're obviously worth a lot more as a going concern than as a liquidation play.

[JayGatsby]

Seems like one of those companies that should liquidate in a recession. Would be doing shareholders a favor.

That doesn't really make any sense in real life. You'd want them to dump their inventory of used cars in a market with no buyers? And sell their freehold assets to whom exactly? They're obviously worth a lot more as a going concern than as a liquidation play.

I just meant one of those companies that bumps along through good times and gets washed out in a recession. Probably said that wrong. With tangible book of 44c per share and an ROA of ~2% in pretty good times there's no real reason for this business to exist.

 

 

[samwise]

I'm invested in both Companies. Anyone thinking of taking a position here - or understanding how tough the situation is - should listen to this interview with Vertu's CEO: https://cardealermagazine.co.uk/publish/vertu-motors-boss-robert-forrester-car-dealer-live-midday-tuesday/189057

 

Thanks for the link kab.

 

They expect to emerge with extra debt, the magnitude of which will depend on the length of the shutdown and their cash burn. Not very comforting since that raises the effective EV at which these are available.

 

Cambria hasn’t said anything in this much detail, or at least I couldn’t find a link.

 

The UK government has said they will provide loans to dealers below £500M sales. These guys are too big for that.

[kab60]

Seems like one of those companies that should liquidate in a recession. Would be doing shareholders a favor.

That doesn't really make any sense in real life. You'd want them to dump their inventory of used cars in a market with no buyers? And sell their freehold assets to whom exactly? They're obviously worth a lot more as a going concern than as a liquidation play.

I just meant one of those companies that bumps along through good times and gets washed out in a recession. Probably said that wrong. With tangible book of 44c per share and an ROA of ~2% in pretty good times there's no real reason for this business to exist.

I don't think ROA is very meaningful here. ROE for a net cash business is quiet respectable in Brexit UK. Shouldn't have any difficulty handling a recession - UK wasn't far from one - but times are obviously quiet dicey now with the country in lockdown.

[kab60]

Vertu CEO Robert Forrester on Twitter 1 hour ago: Our website sessions are getting perilously close to last years levels!

 

I think dealerships are a great deal right now. I prefer Cambria in the UK and Asbury in the US longer term, but Autonation and Vertu looks good as well. They're all very resilent with high % of GP from service (Asbury @ 48 %) with a very variable cost structure (sales people mostly earns commissions, they often own their properties). Also, in China new car sales has quickly picked up. It makes sense that people prefer to drive over mass transit.

[nspo]

Hey kab60 and others. I've been doing due diligence on Cambria and have come to the same conclusion of attractiveness. I have TDAmeritrade and can't get the shares through them. Does anyone have a solution, besides investing with Packer  8)

[matts]

Hey kab60 and others. I've been doing due diligence on Cambria and have come to the same conclusion of attractiveness. I have TDAmeritrade and can't get the shares through them. Does anyone have a solution, besides investing with Packer  8)

 

Interactive Brokers?

 

[kab60]

I use IB and have no problem buying Cambria except that it is quiet illiquid and the spread is large.

[nspo]

Thanks for the help. I'll have to setup an account

[kab60]

Another update from Robert: https://www.business-live.co.uk/retail-consumer/vertu-brings-back-staff-after-18145020.amp?utm_source=twitter.com&utm_medium=social&utm_campaign=sharebar&__twitter_impression=true

[kab60]

And another one sent 12h ago:

 

Step change yesterday: 2825 phone calls into dealerships, 1816 service bookings made for coming weeks. 380 internet sales enquiries and 66 retail car orders taken! Bike and van sales also strong! #backtolife

 

Most of the sales are used cars

[kab60]

Another one from Robert Forrester: Yesterday the Group received 2599 inbound phone calls, made a massive 4722 number of service bookings and saw internet sales enquiries increase to over 400 for the first time since March #FightBack

 

It's still cheap, but I've swapped all my exposure from Vertu to Cambria and Motorpoint since I prefer them longer term

[kab60]

Cambria out with results, unfortunately it already popped and it was hard to get exposure, but it was trading at 3xearnings, growing double digit and with 15-16 pct. return on equity with pretty much no debt as recently as last week. Liquidity position still very strong despite significant downturn: https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/CAMB/14529589.html

 

Asbury Automotive in the US was out with results yesterday as well - they were surprisingly strong, I'd say, and the commentary pretty bullish. They're getting ready to take advantage of any distressed sellers it seems.

 

The whole space was clearly cheaper a couple of weeks ago, but they're still cheap all of them I'd say. Like in any crisis good companies should have unique opportunities to emerge stronger. Motorpoint is the most expensive on a P/E basis, but the high ROIC and organic runway probably justifies the premium since they need very little capital to grow and return it dividens and buybacks. Cambrias growth is more lumpy, but it has been surprisingly strong I'd say, and they're well positioned having as late as january picked up distressed assets.