MOTR.L - Motorpoint Group

[no_free_lunch]

I have started a position in Motorpoint Group.  This company is a nearly new (aka used) car dealer in the UK.  There is a great writeup on VIC that i recommend you reference as I can't add to much to it.

 

I will just give you the basics here, in point form and everyone can decide for themselves if they want to look further:

 

- Has grown double digits organically.  Growth is via existing stores + the occasional dealership opening.

- No debt.

- Small cap.

- Has repurchased 10% of outstanding shares over past few years.

- Management has skin in the game.

- Pays a 3.5% dividend.

- Conservative management.

- Trades at a PE of 10-11.

 

[samwise]

I have a small position. It’s cheap, earns high returns on existing equity, can reinvest some cash in new stores at the same high returns, and has returned other FCF to shareholders by dividend and buyback. It’s a good business at a decent price. If only they had more reinvestment opportunities, it would be perfect. It’s compared to KMX, but doesn’t do any financing, sells newer cars, and sources from more than just auctions.

 

But I don’t own a large position because I don’t understand the durability or source of their advantage. I’ve thought about it, and here is what I currently think. Why should they earn good returns? It’s just a retail operation which buys from large fleets and BCA auctions, then sells to price conscious consumers. On both sides they are probably price takers. Plus they offer consumers lowest prices, i.e. lower margins. I think they get the good ROE by lower margins but higher turnover, and they use floorplan financing, a form of leverage. The turnover is based on the brand they have in front of consumers: lowest prices, no haggling, online selection. Why can’t a new competitor copy that business model? Sure the brand will take some time to build, but you can do it locally one market at a time. The only durable and defensible part of their advantage is probably from size: larger online selection, perhaps easier access to floorplan financing.

 

Do you understand why they should keep earning high ROE? What’s the moat here? Not saying it doesn’t exist. Just trying to understand it. Perhaps people who have followed KMX know about their advantages.

 

And why did a large shareholder sell a big block recently?

[kab60]

I think most businesses can be copied. They might not have a moat, but don't underestimate execution. Their NPS and repeat customers gives me confidence they're not your typical car dealership. The big shareholder apparently sold due to a divorce. Stock was trading at 250, Company bought a chunk at 200. I like that.

[no_free_lunch]

There should be a scale advantage relative to smaller competitors.  Beyond that it does come down to operations.  I wonder what the current roe is on peers, probably not this high.  You have management acting in shareholder interest via div and buybacks, could go ok.

[kab60]

Anyone know why they don't open new stores more aggressively? Sure it would put some pressure on their margins, since they take time to ramp, but still? Target is 20, I believe they're at 12-13 now?

[no_free_lunch]

I was under the impression that the store openings will always be slow. It takes significant effort to set them up, there is risk, they want to do if right.  This is one reason I think of management as conservative.

[samwise]

This is a tough industry! I found lots of banckruptcy and failures. So I agree it is all about execution.

 

Some interesting reading and watching for those following this stock. The first article talks about the importance of the store manager in the car supermarket business, of which Motorpoint is the biggest at 20% share. The collapsed chain was third largest, so not sub scale.

 

https://www.motortrader.com/general-news/is-this-the-end-of-the-line-for-multi-site-car-supermarkets-12-03-2007

 

The author of the next paper picked three winners for UK online used car sales, but Motorpoint wasn’t in that top three.

https://en.calameo.com/read/005962371ce4bd3c2692a?page=1

 

A show which featured a Motorpoint shop, starting about 18-20 minutes in the episode. The video doesn’t indicate any online sales in 2013.

 

https://www.dailymotion.com/video/x6q0lsb

[kab60]

Thanks for the above. Also check out Pendragon. Closing 2/3 of their Car Stores. The US is also littered with companies trying (and failing) to copy Carmax.

[kab60]

Judging by the numbers of reviews during the last month (https://www.feefo.com/da-DK/reviews/motorpoint?withMedia=false&timeFrame=SIX_MONTHS&displayFeedbackType=BOTH) business is slooooow. As expected. UK car sales fell to the lowest level since 1946 in April: https://www.bbc.com/news/business-52508010

 

But, longer term, it's quiet pleasant to read the reviews of Motorpoint from its customers. You wouldn't think they were a used car sales Company. Used car sales, according to Robest Forrester, CEO of Vertu Motor PLC, have also been quicker to pick up.

 

Will be interesting to see how it all falls out. Pendragon tried to do a deal with Lookers but was turned down. Both have a lot of issues to deal with, which I suppose smells of opportunities for well-run players to gain share.

[ukvalueinvestment]

If you are not from UK, you need to know two things - I'm not saying the car dealers aren't cheap:

 

- They are currently being investigated by the financial regulator for practices in their car financing. 

- Many people believe there is a car financing bubble, with a crash in values on the way.

- There is a shift online, I don't know much about it.

[kab60]

If you are not from UK, you need to know two things - I'm not saying the car dealers aren't cheap:

 

- They are currently being investigated by the financial regulator for practices in their car financing. 

- Many people believe there is a car financing bubble, with a crash in values on the way.

- There is a shift online, I don't know much about it.

Yes, thanks for adding that.

 

FCA has been reviewing the space for plus 2 years, and I obviously think one is more than compensated for the risk at these levels. Something like Cambria, which is a fine business with lots of liquidity, traded down to some 2x2019 ebitda. (also, having read Spider Network on rigging of LIBOR I'm not too worried about FCA - it seems like a pretty toothless watchdog).

 

I think the biggest risk is how long it takes before things normalize in the UK. The closure of dealerships has been more strict than in the US, so dealers have mostly done service for NHS workers which isn't a good position to be in.

 

If anyone wants more insight into the current trends Group 1 Automotive, which is active in both the US and UK, just released their Q1 report which looks pretty good I'd say: https://seekingalpha.com/pr/17858749-group-1-automotive-announces-first-quarter-2020-financial-results

 

Dealers are obviously hurt by the lack of sales of new and used cars but also that people shelter at home and thus doesn't drive much which hurts service, which is a big part of GP. But generally their cost structures are pretty variable, so I think the dealerships with enough liquidity should be fine.

 

The move to online sales should favor those with scale and either way I think we'll see consolidation coming out of this. Too many UK dealerships in the UK struggle to earn money.

[kab60]

Motorpoint doing fine. Did 18,8m profit before tax on some 20m equity and outlook is fine - they take share and NPS went up. I think the econonomics of this model is underappreciated. The massive ROE allows the company to return a massive amount of money between buybacks and dividend while investing in organic growth with high returns. That should supercharge EPS growth down the line.

 

According to prelim results they secured two spots for new stores compared to just 13 today.

 

Anyone have a transcript from analyst meeting?

[kab60]

Company out with a trading update today, which looks good. Trading since reopening ahead of performance in prior year and margins are strong. CFO stepping down which is usually a negative.

 

Like other car retailers, there seems to be a lot of pent up demand following lockdowns and perhaps from more people ditching public transportation for a private vehicle.

 

Used vehicle prices also seems to hold up very well - DRuizG80 on Twitter is worth a follow for anyone who cares.

 

For anyone worried about online only-models taking share in the UK - and perhaps of interest to Carvana bears/bulls as well - this article is quiet interesting. It's a take on how Cazoo, a sort of British Carvana, are getting bigly into brick and mortar-stores (a significant shift in strategy).

 

https://cardealermagazine.co.uk/publish/used-car-dealer-cazoo-on-the-hunt-for-16-more-sites-as-it-ramps-up-its-retail-plans-for-a-footprint-across-uk/200951

[kab60]

I think this is another interesting data point which shows how difficult it is to run a car supermarket ala Carmax and Motorpoint:

 

https://cardealermagazine.co.uk/publish/pendragon-to-axe-car-store-name-as-it-aims-to-launch-digital-used-car-sales-solution-to-rival-upstarts-cazoo/201525

 

I also find it somewhat laughable that Pendragon has profitability targets for 2025 and already plan to roll out 8 of these new stores. When Auto Nation launched Auto Nation USA - used no-haggle car sales - they took a very measured approach and have since - some years after - decided to build on those learnings and expand that line of business. But it takes a lot of tweaking to get the concept right. And building eight new stores from scratch seems likes a difficult task, but we'll see.

 

As for Motorpoint, it bugs me somewhat that their CFO left.

 

Their customers reviews are really good, as are their NPS, but it seems their financing provider of choice, Black Horse  (wow, does that sound shady?) has horrible reviews. Perhaps that's just the nature of a business like that, but it's not exactly comforting.

 

Motorpoint make a lot of money on commissions, and the FCA and increased regulation is listed as a risk factor in their annual report. Did anyone diver deeper into this?

[ukvalueinvestment]

I wouldn't worry about "Black Horse".  They are a well known subsidiary of Lloyds, the biggest UK retail bank.  Lloyds' adverts feature magnificent black stallions galloping across beautiful landscapes, so it's a well known brand.

[kab60]

Thanks. Still think it seems like a silly choice of provider when the first review on Trustpilot is like this (1 week old):

 

Cheats and Criminals! AVOID! Sent me payment requests & statements for a completely wrong registration number which obviously I didn't pay. They then placed defaults on my credit file for THEIR MISTAKE! (

https://uk.trustpilot.com/review/blackhorse.co.uk)

 

The general score of Black horse is pretty horrendous, and it intuitively makes sense that people don't like finance providers, but others seem to do just fine on customers satisfaction: https://uk.trustpilot.com/categories/car_finance_and_loan_company

 

Probably nothing, but it does nag me somewhat. Will probably just ask the Company.

 

 

[BroKon]

As ukvalueinvestment mentions, they are a well-known sub of LLoyds. To give you more comfort just look at all the UK banks on trustpilot, none score well. Even FirstDirect, which is supposedly the most popular bank as voted by its customers has a bad trustpilot score.

[kab60]

Yes, I'm just a bit puzzled that a player with such a high focus on customer satisfaction and NPS use an actor with such awful reviews. I'd guess there's a risk that customers mix their different experiences together, but yeah, just a minor thing (Motorpoints NPS is quiet impressive and trending in the right direction, so doesn't seem to hurt them).

[Anglozurich]

A previous post was asking about the moat here. This is my view....

 

Reading CarMax' annual reports over the last 20 years shows that the reputation they have built as a result of their infrastructure, employees and systems can not easily be replicated. This goodwill is not only applicable to the customer experience but it also has balance sheet benefits in terms of employing less capital due to the increasing trust it has from floorplan finance providers. Their reputation for selling high standard/well-conditioned used cars and effectively screening customers with good credit is not lost on finance providers such as Ally. Ally will be willing to allocate a lot of capital to CarMax based on the robustness of its controls, processes, culture and employee incentives. This reputation of being a trusted channel for credit to underwrite through is hard to achieve. As a reward, KMX financing is slick and equity employed is a lot lower than a sub-scale used car supermarket or franchise dealership with no reputation, little infrastructure and dangerous incentives associated with selling cars and credit.

 

Take a company like Cazoo....the different views between equity and debt imo will be large. From the equity vantage point, the hopeful and the speculative types see this business as online, capital light and a disrupter (even though it is desperately searching for physical outlets they call 'customer centres' lol....not supermarkets or dealerships https://www.am-online.com/independents/news/2021/01/12/cazoo-opens-14th-car-handover-customer-centre-in-newport-pagnell)... Finance providers like Black Horse and other UK car finance providers increasingly entering the market will not look at Cazoo in the same way imo. Debt guys look backwards! It does not have MOTR's track record, reputation, proven discipline and infrastructure. This just simply takes time and it has to be done organically. Cazoo have acquired Imperial Cars, a group of supermarkets. This inorganic style of growth in the used car space can be deadly as its such an inherently decentralised business that can have legacy issues with poor ethics, incentives and processes. This is not a business your idiot nephew can run. Lookers Plc problems prove this. MOTR's organic rollout with cookie style processes and systems is a distinct advantage.

 

I wish MOTR would engage aggressively in financing more because originating loans can be a huge competitive advantage and profit centre. Like CarMax, can MOTR look into securitisations and move away from reliance on one finance provider (BH). They maybe already doing this but a well-oiled floorplan financing machine with securitisations, originations and even retaining a small piece of the financing for alignment with the underwriter can compound the financing revenue stream.

 

I am excited about this company, as i think it just has to keep doing what its doing. I wondered if anyone had any broad brush reasons why CarMax gross margins are double MOTR's but CarMax's SG&A is double? Net income is 3-4% for CarMax because of this financing line it seems.

 

[kab60]

I think those are some good points, Anglozurich. I've traded in and out of Motorpoint a couple of times, whereas Cambria is a core holding.

 

With Cambria you have a great track record, underearning locations and some tangible value in all the dirt that they own in and around London. On top of that, you have a lower starting valuation.

 

Clearly, when you look at the numbers, Motorpoint has better economics despite the lack of service and maintenance revenue.

 

Motorpoint also has a great track record, but there's little tangible equity and valuation is a lot higher, so one needs to get comfortable with the quality of the business and why competitors wont chip away at their returns. Also, the fabolous unit economics means less if they're only expanding at a modest pace.

 

I think you've made a strong case for Motorpoint, and I tend to agree with you. It has been easy for me to buy Motorpoint around or below 200 pence where you pay around 10 times (growing) earnings, but at 300 I've taken profit twice.

 

CarMax has shown how hard it is to copy the model in the US, but I suppose I'm still a little bit worried about players like Cazoo but also Vertu, which seems to ramp up their car supermarkets. With Cambria trading below tangible book value and a credible case for getting back to 20 pct. ROE, it's just an easier and safer play for me (which is why it's almost a 10 pct. position).

 

 

 

[Anglozurich]

Thanks Kab.

 

I struggle to compare Vertu and Cambria with MOTR given the former are fundamentally different businesses i.e. franchise dealerships. Like you say, this is reflected in completely different economics. The in-multiple for a lower return on capital business such as Vertu, Pendragon, Lookers, Marshall, Cambria, etc reflects the fact as a shareholder you are continually paying up via 1) higher capital expenditure spent on land acquisitions/buildings all based on the manufacturer's spec 2) acquisitions of existing dealerships based on an earnings multiple (and exposure to their respective people, systems and processes which all vary in quality substantially). You are also accepting lower inventory turns, standard risks associated with their manufacturer relationships/terms/brand and restricted financing options. You do however get after-sales and repair-work margin.

 

I am citing the obvious differences between the two different business models that you are already aware of..... but this is about whether MOTR can execute. The two Marks own over £50m in shares or 20% of the company, so they must think that they can. MOTR absolutely needs to deliver on ancillary revenue streams to replace the forgone new car sales and after-sales of a franchise dealer.......and the obvious choice is financing and origination for me. I am from the UK, and it is interesting to observe the changes and likely growth in the car financing market.

 

 

[kab60]

The asset-light nature of Motorpoint and the potential to deploy capital at a high return for a long time is obviously the attraction. As you mentioned, franchised dealers have to invest quiet a bit of capex. However, if you compare Cambria to the volume dealers, the economics are very different.

 

It's not quiet as good as in the US, but if they can get ROE closer to their historical range and edge up towards 20 pct., the combination of low fixed costs and plus 40 pct. of GP from maintenance and service, you get an above average business at a very low price with lots of tangible equity. Also, Cambria has a very good track record in buying distressed dealerships. Unlike some of the others, I believe they never paid any goodwill.

 

I don't think Cazoo will succeed financially, but don't you think it might hurt Motorpoint anyway? Why do you think Motorpoint hasn't more aggressively opened new sites? Could it be due to increased competition and worse economics on new builds?

 

https://cardealermagazine.co.uk/publish/cazoo-opens-another-customer-centre-as-new-vehicle-prepping-business-plans-24-hour-a-day-operation/218733

 

Really appreciate the perspective.

[Anglozurich]

Yes i know what you mean. A good chunk of the equity value you refer to is in the from of special purpose real estate, which i personally don't like. The rest is inventory, some of which is a risk because its not turning as quickly. Like for like / same store comparable unit sales year on year is the most important measure of profitability and think MOTR will deliver on this KPI.

 

How many cars has Cazoo sold compared to MOTR's £1billion in sales? Genuine question. I imagine it looks very small in comparison to MOTR and not even in the same ball park. I also think part of the reason Cazoo is scrambling around for customer centres and acquiring anything in sight from dealerships, supermarkets, random technology and land for customer centres is that they have probably realised that there will not be enough customer journeys started and finished 100% online post-lockdown..........and they have to spend VC money they have raised somehow. The chances of wastage are high. 90% of the customers start online (it has been like this for years but the growthy-tech-dreamers have tried recycling the story) but many customers want to finish it in person and so the hybrid approach is where we will end up. The huge gamble of pure online only almost received false reinforcement bias due to the lockdown. The founder seems like a Chamath type and I am really skeptical of those types. He cashed out £100m in the last raise apparently.  I like that MOTR has not buried their head in the sand and tackled digital and deliveries head on but they still stick to their knitting.

 

On the rollout, I am no sure if 20 sites in the medium term is that cautious. They are perhaps monitoring these trends and understanding how much in terms of digital sales / click & collect will change the mix. Can they expand certain sites at a higher ROCE etc rather than build a new one. I would rather thoughtfulness in the rollout. They need time to target mid-sized UK cities.

[Anglozurich]

https://www.cnbc.com/2021/03/29/british-used-car-dealer-cazoo-is-going-public-in-the-us-via-spac.html

https://www.cazoo.co.uk/static/docs/Cazoo%20-%20Investor%20Presentation.pdf

We officially live in a world of chocolate streets and marshmallow buildings.

In 2020 Cazoo sold 12,000 cars, generated £162m in sales, negative £3m in gross profit and negative £100m in free cash flow. VALUATION = $8 BILLION[/b>

Sponsor gets $90m of equity on day one.

........I am calling bubble.

[kab60]

New strategy announced yesterday. Increases growth ambitions agressively. Wants to double revenue to 2b and improve margins towards 2024. Track record is stellar, management is credible and has skin in the game. I, and others, had hoped for a more agressive expansion before, but now it is definately here. I don't do relative valuations, but the discrepancy between this and Cazoo is mindbobbling and unlike anything I think I have ever seen. Market hasn't really reacted despite what I would call very bullish news, but I think it'll catch up. Made it a 10 pct position.