Author Topic: VTU.L - Vertu Motors  (Read 8849 times)

compounding

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Re: VTU.L - Vertu Motors
« Reply #20 on: October 09, 2019, 05:18:57 AM »
They can't really get much more aggressive with open market purchases; they've been buying 25% of the daily volume some days recently. 2% of the shares outstanding in H1 isn't bad, I'll be pretty happy if they keep that pace. They would probably have to do a tender if they want to get more aggressive with the buyback, or raise the hurdle for buybacks (think it's tangible book at the moment).

The acquisitions have been pretty reasonable historically as far as I can judge, I don't expect that to change going forward. If anything, they have acquired less companies than I thought when in started my position. It's a small position for me too, but I think they are doing a pretty solid job lately. The big scare is a new equity raise, as has been discussed earlier in the thread.

@JohanHjortsson


Packer16

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Re: VTU.L - Vertu Motors
« Reply #21 on: October 09, 2019, 05:48:58 AM »
How are the results positive?  The only metric that is up is sales which is good given new car registrations are down 6.5% over the past 11 months.  The margins are down from 1.24% to 1.19% & inventory turns are down to 5.4x to 5.6x & this is the high selling season (volume margins & inv turns are typically down in 2H).  His discussion talks about how he had cost control how did this show up in the financials?  He was aggressive & he said it paid off but his profits are down.  He said it was fun but IMO he had very little cost control.  Is there a lot of cognitive dissonance here or am I missing something?

In all of their incentive & other material, they never mention inventory turns (a key KPI IMO).  How can you run an auto dealer and not focus in inventory turns?

IMO the acquisitions historically have destroyed value.  The RoE is subpar 7% for an auto dealer, margins in the low 1%s & the firm trades a substantial discount to book value (which again shows the market thinks these guys overpaid).  If you look at Cambria the number are much better (RoE in the mid teens, higher inventory turns & margins above 2%). 

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« Last Edit: October 09, 2019, 06:12:25 AM by Packer16 »

kab60

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Re: VTU.L - Vertu Motors
« Reply #22 on: October 09, 2019, 06:45:59 AM »
Good in the context of earnings not dropping off a cliff (take a look at Pendragon) and trading at less than 2,5xev/ebitda now while returning some 10 pct to shareholders.

I think everyone agrees Cambria is much better run (I have a position), but it's also more expensive, and while Vertu is lowering capex, Cambria has significant investments ahead.

If Cambria can keep up the returns, obviously that's a plus and not a negative.
« Last Edit: October 09, 2019, 06:48:12 AM by kab60 »

Packer16

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Re: VTU.L - Vertu Motors
« Reply #23 on: October 09, 2019, 08:13:26 AM »
I guess it depends upon your focus.  IMO Vertu & Pendragon are in a commodity business.  Pendragon compounded its difficulty by running a subscale used car business.  Just look at how much fruit VTUs marketing spend got them (less loss).  IMO the known franchises in UK auto retail are Motorpoint and Cambria.  Being an auto retailer & not focusing on inventory turns IMO tells you the story here.  Until they focus on the right things, I think they will continue to struggle & sell at a discount to those who do focus on margins & turns.  I do think buying back stock is the right thing to do versus acquisitions but IMO there is more wrong here than paying too much for dealerships.

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« Last Edit: October 09, 2019, 09:41:27 AM by Packer16 »

kab60

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Re: VTU.L - Vertu Motors
« Reply #24 on: October 09, 2019, 10:37:14 AM »
I guess it depends upon your focus.  IMO Vertu & Pendragon are in a commodity business.  Just look at how much fruit VTUs marketing spend got them (less loss).  IMO the known franchises in UK auto retail are Motorpoint and Cambria.  Being an auto retailer & not focusing on inventory turns IMO tells you the story here.  Until they focus on the right things, I think they will continue to struggle & sell at a discount to those who do focus on margins & turns.  I do think buying back stock is the right thing to do versus acquisitions but IMO there is more wrong here than paying too much for dealerships.

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I don't disagree. Over the long term I prefer Cambria and Motorpoint, but I still think Vertu is worthy of an investment at these levels. They're on par to do 5P EPS on tangible net assets per share of 46,1P.

Considering the net cash position it's not exactly a disaster - nor great. It is a disaster when one takes their goodwill and intangibles into account, which shows they've clearly overpaid/aren't executing well enough, but I'm not paying for their failed M&A today. I'm getting it at a pretty fat discount to tangible equity (close to 30 pct. around open).

Analysts have them pegged at 42m ebitda fiscal year 21 (6 pct. growth y/o/y) while EV today is 94m (123mcap less 29m net cash.

My bet is that it'll do okay if they keep returning cash to shareholders and stay away from big deals. The last point being my biggest concern.

compounding

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Re: VTU.L - Vertu Motors
« Reply #25 on: October 14, 2019, 08:02:50 AM »
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?



@JohanHjortsson

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Re: VTU.L - Vertu Motors
« Reply #26 on: October 14, 2019, 09:52:38 AM »
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.

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whistlerbumps

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Re: VTU.L - Vertu Motors
« Reply #27 on: October 14, 2019, 01:08:14 PM »
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

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Re: VTU.L - Vertu Motors
« Reply #28 on: October 14, 2019, 02:01:18 PM »
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%)?

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compounding

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Re: VTU.L - Vertu Motors
« Reply #29 on: October 14, 2019, 11:50:42 PM »
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.
@JohanHjortsson