Stephen Bland runs the rule over Vertu Motors' final-year results.
I've reviewed car dealer Vertu Motors (LSE: VTU) a couple times before, the last on 20 October 2011 when the shares were 24p. They stand now at an offer price of 29.5p, but note that there is chunky spread of 2p so that the bid price is 27.5p. Relatively large spreads are common with small caps and make it a bit harder to score a decent gain. Vertu has a cap of £59m at the offer price.
The company has just released its final results for the year to 29 February, so I'll take another look at it. First, though, and just to recap, the attractions of the share in my earlier reviews centred on it trading below tangible book and having net cash. The price-to-earnings (P/E) ratio was nothing special and the yield was pretty low. But as I've mentioned before, the four pillars of pyad are not of equal strength. I consider price-to-tangible-book-value (P/TBV) the lead ratio with net cash as second feature, the other two trailing behind in importance. Ideally, all four should be in place but few shares met the ideal, which doesn't mean that others like Vertu aren't worth a scroot.
The facts are now that eps was 2.53p against 2.02p for 2011 for a rise of 25%; the dividend is 0.6p, up 20% on last year's 0.5p; tangible net assets per share are 41.6p compared with 40.1p and net cash is £3.5m, way lower than the previous £13.6m.
These gives us a historical P/E of 12, a yield of 2.0% with P/TBV at 0.7.
There are assets, and then there are assets
I'll further dissect the net tangibles because their nature is an important consideration. There are assets and then there are assets. The company holds £79.4m equal to about 40p per share of freehold and long leasehold property, which alone is substantially in excess of its market cap of £59m at 29.5p. Freeholds actually comprise 48% of all their sites. Property is usually one of the more valuable assets in a business compared with stuff like stock or plant. So I'd say it continues to score very well in the tangibles department.
Although actual eps is not the lead indicator in a deep value play, the trend is worthy of consideration. It don't hurt any to see a rising trend and clearly that is preferable to static, falling or losses. There has already been a good rise from 2011 to 2012, but we need to examine the directorspeak to form a view of the future.
They talk of current trading for March and April being significantly ahead of prior year and budgeted levels and, more generally, the new car market is showing growth following a period of decline in 2011 with their like-for-like volume sales of used cars also ahead. Servicing sales are ahead, too, although accident repair continues weak. Overall profitability is above last year and they are confident in the outcome for the remainder of the current year, so the rising trend seems set to continue.
The enemy of value
One potentially negative feature of Vertu in my opinion is that it has expanded principally by acquisition, and intends to go on doing just that. Generally speaking, acquisition is the enemy of value and disposal the opposite, but by definition of a generality there are always some exceptions.
The car dealer business is pretty fragmented and Vertu's aim is to defragment it to some extent and thus build up a relatively large concern in what has been often a "mom and pop" affair, as our friends across the pond say. Specifically, they aim to purchase underperforming sites, believing that their expertise can turn them round. That's a fine strategy if you can work it successfully because it enables those businesses to be obtained at bargain prices.
So far at least Vertu appears to have been doing this right on balance, though, there have been some dealerships that didn't work out, which is only to be expected on the basis of you can't win them all -- but you don't need to in order to make good money.
The difficulty from a value standpoint is that this aggressive acquisition policy consumes cash and if there is more than a certain level of it, the cash outflow is at first higher than the cash inflow from the rest of the business plus the new acquisitions. That's principally why their net cash balance fell such a lot in 2012. Eventually, if the turnrounds are successful then this should reverse when the acquisition process slows down, but there may be a point in between where they run out of net cash and go into net debt. In fact, they comment that their £3.5m plus debt commitments of £35m enables their further expansion from existing resources.
Overall, I think Vertu still looks like a decent value play due to its very strong net tangibles situation, but because of its acquisition policy -- which may delete the net cash and the weakness of the P/E and yield situations -- I draw the same conclusion as before; that this is not one for farmers but could be part of a value portfolio, especially with what now looks like a rising eps trend.
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> Stephen does not own shares in Vertu Motors.
