Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: whistlerbumps on March 09, 2015, 12:19:12 PM

Title: VTU.L - Vertu Motors
Post by: whistlerbumps on March 09, 2015, 12:19:12 PM
VTU is a UK car dealership that is undervalued because current margins have been depressed by the company's strategy of acquiring and turning around loss-making dealerships.  There is no structural reason why VTU's margins should not approach the 2.0%+ achieved by peers LOOK and PDG's volume division.  At 2%, EPS would be ~GBp 10 which could generate a 100% return with a 12x P/E.  Even with current depressed margins, VTU earning ~5p so downside seems protected near current share price.  Strong balance sheet and good management team in my opinion. 

Title: Re: VTU.L - Vertu Motors
Post by: notorious546 on March 23, 2017, 10:18:13 AM
https://gallery.mailchimp.com/6baeceda9bb7d6e6ebecd0933/files/3bb56367-8cdf-4c1b-82d5-2df038189c83/C4KMMI1_IBV_Capital_on_Vertu_Motors.pdf?utm_source=Capitalize+for+Kids+Investors+Conference+2016&utm_campaign=560d832f8c-EMAIL_CAMPAIGN_2017_03_14&utm_medium=email&utm_term=0_058eb76957-560d832f8c-517270177
Title: Re: VTU.L - Vertu Motors
Post by: whistlerbumps on April 07, 2017, 09:32:41 AM
Thanks. I still think Vertu is massively mispriced at current levels unless the UK enters into a severe recession. 
Title: Re: VTU.L - Vertu Motors
Post by: muscleman on April 09, 2017, 09:58:42 AM
https://gallery.mailchimp.com/6baeceda9bb7d6e6ebecd0933/files/3bb56367-8cdf-4c1b-82d5-2df038189c83/C4KMMI1_IBV_Capital_on_Vertu_Motors.pdf?utm_source=Capitalize+for+Kids+Investors+Conference+2016&utm_campaign=560d832f8c-EMAIL_CAMPAIGN_2017_03_14&utm_medium=email&utm_term=0_058eb76957-560d832f8c-517270177

"This is in part due to legislation, which forbids manufacturers from owning their own dealerships (in most states), as well as strong dealership contracts that make agreement terminations by manufacturers very difficult. "

They said this for the US dealerships. Do you know if the UK dealerships have this kind of advantage?
Title: Re: VTU.L - Vertu Motors
Post by: whistlerbumps on April 25, 2017, 07:50:15 AM
UK dealer/manufacturer relations are governed by Europe block exemption rules. They are not quite as dealer friendly as the US system but its still very rare to see a dealer terminated.  More often, the manufacturer will work to push the sale of an underperforming dealership.
Title: Re: VTU.L - Vertu Motors
Post by: kab60 on September 10, 2019, 10:45:01 AM
Took a position today. Trades at 50 pct of BV or 35c vs 45c tangible book. Net cash of 20m, 3,2xev/ebitda FYE. New car sales is already in a recession in the UK, but the jewel is service which grew 8 pct. in most recent period.

Not gonna happen, but if they took leverage to x1ebitda they could almost retire half the shares for a proforma PE of 4.

They have spent 85m on capex in the last 3 years (and returns are not impressive but possibly deflated from buying struggling dealerships) vs a market cap of 125m currently.

After massive upgrades capex is projected to come down, so they'll harvest free cash. Their historic returns are mixed if not bad, but they seem to have smartened up and buyback shares (some 7-10 pct returned through divy and buybacks anually).

Cambria, another UK dealership, is a better business, but they're looking at massive upgrades and it is more expensive - though very cheap. Might take a stake there as well (also bought Motorpoint, a sort of UK Carmax).


Title: Re: VTU.L - Vertu Motors
Post by: maude on September 10, 2019, 11:23:41 AM
I used to own Vertu as well, but I think Cambria will create more per-share value over time. Plus, Cambria has a significant near-to-medium term tailwind from the new luxury dealerships, which have yet to contribute much to profits. My biggest complaint about Vertu is they issued equity a few times when the stock was trading at low multiples. Cambria will almost certainly never do that. I wonder if Robert Forrester has truly changed his philosophy about this. My guess is not, and they have told me in recent months they would issue equity if at some point they have an opportunity to make a very large, transformative acquisition (buying another large dealership group). They didn't have any expectation this would happen any time soon.
Title: Re: VTU.L - Vertu Motors
Post by: kab60 on September 10, 2019, 11:51:48 AM
I used to own Vertu as well, but I think Cambria will create more per-share value over time. Plus, Cambria has a significant near-to-medium term tailwind from the new luxury dealerships, which have yet to contribute much to profits. My biggest complaint about Vertu is they issued equity a few times when the stock was trading at low multiples. Cambria will almost certainly never do that. I wonder if Robert Forrester has truly changed his philosophy about this. My guess is not, and they have told me in recent months they would issue equity if at some point they have an opportunity to make a very large, transformative acquisition (buying another large dealership group). They didn't have any expectation this would happen any time soon.
Thanks, much appreciated. Sounds terrible and fits a nagging feeling I have (their new chairman is a car guy- Cambrias has a corporate finance background and knows about ROIC above WACC...) Did you get a feel for what drives Vertus ambition and whether they weigh all capital allocation decisions through the same lens (by buying shares they "buy" dealerships and half of what they paid) or they just wanna grow for growths sake? What do they mean by transformational? Forrester owns 2%, but he might be driven by ego?
Title: Re: VTU.L - Vertu Motors
Post by: cmlber on September 10, 2019, 04:55:37 PM
I used to own Vertu as well, but I think Cambria will create more per-share value over time. Plus, Cambria has a significant near-to-medium term tailwind from the new luxury dealerships, which have yet to contribute much to profits. My biggest complaint about Vertu is they issued equity a few times when the stock was trading at low multiples. Cambria will almost certainly never do that. I wonder if Robert Forrester has truly changed his philosophy about this. My guess is not, and they have told me in recent months they would issue equity if at some point they have an opportunity to make a very large, transformative acquisition (buying another large dealership group). They didn't have any expectation this would happen any time soon.
Thanks, much appreciated. Sounds terrible and fits a nagging feeling I have (their new chairman is a car guy- Cambrias has a corporate finance background and knows about ROIC above WACC...) Did you get a feel for what drives Vertus ambition and whether they weigh all capital allocation decisions through the same lens (by buying shares they "buy" dealerships and half of what they paid) or they just wanna grow for growths sake? What do they mean by transformational? Forrester owns 2%, but he might be driven by ego?

Lavery (CAMB) and Forrester (VTU) both started these businesses in 2006.  Lavery turned an initial base of 10.8MM in capital into 57MM in market value today but over the same period with the same opportunity set Forrester turned 0.60/share into 0.33/share.  Imo, that's all you need to know...

Arguably Vertu is under earning today, but even if you give them credit for doubling margins to peer levels and assume a constant multiple, he still created no value for shareholders over 13 years.  The only way those returns are possible when they've been retaining earnings is if they have been issuing equity at lower valuations than their acquisitions...

I asked Forrester if there's anything he would change about their strategy or execution in hindsight, expecting to hear that he wouldn't have issued cheap equity, and he said no there's nothing he would change.  He also mentioned their M&A target is a yr3 multiple of 5x EBITDA and I asked why he would do that when they can buy their own business with no execution risk at 3x EBITDA and he basically said if you don't have scale then when there is a mass consolidation in dealers in the near future VTU could be screwed by OEMs.  There is some logic to that assuming M&A is only marginally more expensive than buying your own stock, but given the disparity in values we were talking about, it makes no sense. 
Title: Re: VTU.L - Vertu Motors
Post by: maude on September 10, 2019, 06:15:24 PM
By "transformational" deal, they just meant "very large" deal. My impression from a couple of conversations with Robert Forrester (Vertu CEO) is that he wants to turn Vertu into a big dealership group (basically empire building).
I think Robert Forrester started talking about the logic in stock buybacks, he read The Outsiders, etc. I think this happened shortly after the last equity offering, which was not well-received by investors. My feeling is he may be trying to placate investors.
In my many conversations with Mark Lavery (Cambria CEO), he has always seemed to be very focused on per-share value (and his long-term track record supports this).
Title: Re: VTU.L - Vertu Motors
Post by: kab60 on September 10, 2019, 10:42:48 PM
Thanks, very valuable. I've stayed away from Vertu for a long time but sensed a change of tone (talking about per share value, hurdle rate etc) as well as a very undemanding valuation (ripe for an activist) and nice aftersales growth (higher than Cambria), but what you've described is just terrible from a capital allocation standpoint. Much appreciated.
Title: Re: VTU.L - Vertu Motors
Post by: compounding on September 11, 2019, 01:13:05 AM
My general sense from reading the reports and following the communication and actions from management is that capital allocation has improved quite significantly since the last equity raise. They have done one or two real estate deals to unlock capital, they have refrained from acquisitions due to valuation reasons and returned capital to shareholders via dividends, and increasingly lately, via buybacks. At current prices they have been heavy buyers, buying around 150k shares per day, which is really quite something since the average volume traded in the stock is around 550k. So they have shifted their communication, making capital allocation the prime topic in reports/presentations, and actually followed it up with good decision making.

The balance sheet is great, so there is really no need to issue equity, even if they want to acquire something (with the possible exception of something really big). Their most recent acquisitions have been paid with cash on hand. The margin expansion thesis in combination with further consolidation of the industry, the cheap price and the current capital allocation makes this interesting for me, and I have had a small position since 2016.

My question would be, despite all of the above, do you still not trust Forrester will allocate well going forward? I agree that the investment thesis is broken if they start issuing equity at stupid prices again. I guess the real question here is if the last few years are more indicative of capital allocation going forward than the previous ten.
Title: Re: VTU.L - Vertu Motors
Post by: maude on September 11, 2019, 08:04:57 AM
I guess I'm not sure I trust Robert Forrester completely, but I do think further equity issuances in the next few years is pretty unlikely. That being said, Cambria is trading at a slightly lower P/E multiple than Vertu (based on the companies' guidance to the brokers for the current fiscal year). I have more confidence that Cambria will grow earnings than I do about Vertu, because Cambria has shown tangible progress in this regard recently due to the new luxury dealerships ramping up profitability (and their long-term track record just gives them a lot of credibility in general). Vertu's earnings growth is more predicated on improving the margins of dealerships that are not generating good margins, but this was also the thesis a few years ago and they haven't really shown progress in this regard. However, Vertu's balance sheet is more conservative than Cambria's and Vertu trades at a lower multiple of tangible book value (though I would tend to view the lower P/TBV as a negative because it implies Vertu's ROIC is lower than Cambria's). Having owned and followed both of these companies for a few years now, I can say I feel more comfortable with Cambria, all things considered. That being said, I think Vertu is also undervalued, but less than Cambria.
Title: Re: VTU.L - Vertu Motors
Post by: compounding on September 11, 2019, 10:19:05 PM
Sounds very reasonable, thanks for elaborating.