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Large-scale strategic expansion

Marshall Motor Holdings 15 October 2021 Update
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Marshall Motor Holdings

Large-scale strategic expansion

Acquisition of
Motorline Holdings

Automotive retail

15 October 2021

Price

250p

Market cap

£196m

Adjusted net cash (£m) at 30 June 2021
(excludes £92.4m lease liabilities)

57.2

Shares in issue

78.2m

Free float

35%

Code

MMH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.2)

13.6

88.7

Rel (local)

(2.4)

12.0

53.3

52-week high/low

260p

125p

Business description

Following the Motorline acquisition, Marshall Motor Holdings is the sixth largest UK motor retailer, operating 164 franchises spread across 27 brands in 37 counties. It represents each of the top five volume and premium brands. The group has a strong presence in eastern and southern England.

Next events

FY21 results

March 2022

Analyst

Andy Chambers

+44 (0)20 3681 2525

Marshall Motor Holdings is a research client of Edison Investment Research Limited

Marshall Motor Holdings (MMH) has announced a significant further strategic expansion through the acquisition of privately owned Motorline Holdings for a cash consideration of £64.5m. Adding another top 20 UK dealership group with 48 franchises strengthens brand and geographic coverage and adds approaching £700m of revenues, further increasing MMH’s top tier credentials. The deal should be EPS enhancing and value creating in FY22 despite the current market challenges, underlining why the current FY22e P/E rating appears undemanding. With a resumption of growth in normalised markets anticipated in FY23, MMH retains a strong financial position even after the deal to continue investing for growth.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

2,276

22.1

22.9

2.85

10.9

1.1

12/20

2,154

20.9

21.1

0.00

11.8

0.0

12/21e

2,482

50.2

50.4

13.30

5.0

5.3

12/22e

2,942

25.0

25.1

8.55

10.0

3.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Motorline meets strategic growth criteria

Motorline represents the second largest acquisition made by MMH after the 2015 acquisition of Ridgway. The additional scale is substantial, increasing franchise locations by 41% to 164 (from 116) and strengthening geographic coverage in the south and east of England, while infilling coverage in South Wales and the West Midlands. It also strengthens MMH’s existing retail partner positions with several car manufacturers, adding strong brand entry positions for Toyota/Lexus and Hyundai. The deal is fully supported by all of the relevant new and existing manufacturers. Importantly, with a gross cash outlay of just £44.5m as Motorline brings gross cash of £20m (Motorline has £10m of gross debt), MMH expects to end FY22 with adjusted net cash. That is after buying a franchise’s freehold property for £2.9m alongside the deal, but before options to acquire two more sites for £24.9m within the next 18 months, which MMH is keen to exercise, possibly by the year end.

Optimising returns should add growth through FY25

The company is to spend £10m on integrating the Motorline operations over two years. While this is not expected to lead to any material portfolio changes, it is expected to involve the adoption of MMH’s processes and technologies to optimise returns. We expect this to add around £6m to PBT by FY25, further enhancing organic growth. MMH should thus be well positioned to continue to invest in infill acquisitions and enabling technology as the UK vehicle market continues to transition to electric vehicles over the next decade

Valuation: Deal highlights undemanding rating

We already felt the FY22e P/E rating of looked undemanding and as EPS are enhanced by 9%, the case is strengthened further. Multiple expansion seems likely before a normalised market resumes, which we expect in FY23. The dividend yield also looks very supportive as it returns to progressive growth in line with EPS.

Acquisition of Motorline Holdings

MMH has announced that it is to acquire the family-owned dealership group, Motorline Holdings, for a cash consideration of £64.5m. The transaction is in line with the longstanding strategy of adding scale, expanding the geographic footprint and enhancing growth by making value-accretive acquisitions while maintaining sound financial discipline. Increased scale facilitates investment in new technology, increases customer choices, augments purchasing power and improves operational efficiency while spreading costs. The used car proposition is also enhanced by scale, as well as by an extended geographic footprint, increasing availability and choice of stock. We believe the larger dealership groups should be well positioned to participate as the UK vehicle market transitions to electric vehicles over the next decade.

The deal is being funded from MMH’s existing cash resources and should be earnings enhancing and value creating in FY22. Even after completion, MMH should retain adjusted net cash balances, leaving it well positioned to consider additional infill acquisitions should they arise. Motorline adds around £10m to adjusted net cash balances (£20m gross cash less £10m of gross debt), so the adjusted net cash outflow on completion should be £54.5m. However, the gross cash outflow of just £44.5m on completion maintains a strong liquidity position, which should leave the RCF undrawn.

The company is also buying the freehold property of the ŠKODA franchise being acquired in Canterbury for £2.9m. In addition, MMH has been granted options to acquire the freeholds of the Tunbridge Wells Audi dealership for £12.1m and the new Bristol Toyota/Lexus dealership for £12.8m, exercisable within in six months and 18 months following completion respectively. The landlord is GGT Estates (GGTE), a property company controlled by the selling family, and MMH appears keen to exercise the options sooner rather than later. In addition to the noted transactions, the leaseholds on 14 other properties owned by GGTE have been renegotiated on an arm’s length basis prior to completion.

The company will spend £10m on integration costs spread over FY22 and FY23 to assist increasing returns of the acquired business towards those of the existing group by 2025. The improvements should be assisted by applying the investments in technology and process systems that are enhancing the performance of the group, both in terms of its omnichannel offering and financial control.

There will also be a one-off acquisition cost of c £1.3m and stamp duty payable of c £1.0m.

Motorline strengthens brand coverage

With 1,500 employees, Motorline Holdings operates 48 franchises covering 10 brands across eight counties in the south of England, South Wales and the West Midlands. Five of these are additional brands to the MMH portfolio, while the others strengthen existing partnerships with car manufacturers. Motorline also adds four trade parts specialists (TPS) centres and five used car centres.

Following the deal, the enlarged group will operate covering 37 counties across England and Wales representing 27 brands (including BMW Motorrad) at 164 locations with a total of 10 TPS, seven used car centres, six body shops and one pre-delivery inspection (PDI) site (Exhibit 1).

The deal has the full support of all the relevant manufacturers. The key brand partnership elements of the deal are:

scaled entry into the Toyota and Lexus brands with 19 franchises in key territories, making MMH the second largest representative;

scaled entry into Hyundai with seven franchises as the joint second largest retail partner for the brand in the UK;

adds three Audi, four Volkswagen and three ŠKODA franchises, as well as four TPS operations, further augmenting MMH’s position as the Volkswagen Group’s largest retail partner in the UK;

adds seven Nissan franchises, becoming its fourth largest retailer with 10 dealerships in total; and

increases Peugeot franchises to seven, adding three new locations and making it the French manufacturer’s second largest retail partner.

Exhibit 1: MMH and Motorline combined site locations by franchise

MMH

Motorline

Total

Audi

9

3

12

BMW*

4

4

Ford

2

2

Honda

7

7

Hyundai

0

7

7

Jaguar

7

7

Kia

2

2

Land Rover

9

9

Lexus

0

5

5

Maserati

0

1

1

Mercedes Benz

9

9

Mini

4

4

Nissan

3

7

10

Peugeot

3

4

7

SEAT

4

4

Skoda

12

3

15

Smart

2

2

Toyota

13

13

Vauxhall

2

2

VW

15

4

19

Volvo

9

9

Total cars

103

47

150

Ford Commercial

2

2

LEVC

1

1

Mercedes Benz Commercial

4

4

Toyota Commercial

1

1

Volkswagen Commercial

6

6

Total CV

13

1

14

Total dealerships

116

48

164

Trade parts specialists (TPS)

6

4

10

Used car centres

2

5

7

Body shops

6

6

Pre-delivery inspection (PDI) centre

1

1

Other standalone operations

15

9

24

Total sites

131

57

188

Source: Company reports. Note: *Includes BMW Motorrad brand (motorcycles).

Management does not anticipate any material changes arising from the deal to its portfolio, but over time will continue to optimise its total franchise portfolio to enhance returns.

Motorline had revenues in FY20 of £695.2m (FY19: £717.8m) and generated EBITDA of £10.8m including one-off property and other profits of £4.0m. Excluding the one-offs, adjusted PBT was £2.1m. We expect Motorline to add around £150m in its initial consolidation period in FY21 and almost £700m in FY22. Margins should return to more normal levels from current exceptional levels as the strong pricing environment for both new and used vehicles should moderate when the supply constraints of vehicles progressively ease.

Exhibit 2 shows the impact of the acquisition on our existing estimates, enhancing EPS by 9% in FY22, the first full year of consolidation. As Motorline is exposed to the same UK market supply and demand dynamics as MMH, we expect overall volume trends and trading performance to be similar.

Management indicates expected revenues in excess of £3bn for the combined group, although our FY22 revenue estimate is slightly below that level, reflecting the uncertainty caused by the supply side issues that may persist into next year. As a result, we expect FY22 performance to decline from an anticipated exceptional FY21 result. More normalised markets should facilitate a resumption of profitable growth in FY23, enhanced by improving returns from Motorline.

Exhibit 2: MMH estimates revisions

Year to December (£m)

2021e

2022e

 

Prior

New

% change

Prior

New

% change

New Car

1,008.3

1,074.0

6.5%

978.1

1,291.1

32.0%

Used Car

1,107.1

1,171.3

5.8%

1,045.6

1,350.0

29.1%

Aftersales

267.1

283.1

6.0%

269.7

346.9

28.6%

Intra group

(45.9)

(45.9)

0.0%

(46.5)

(46.5)

0.0%

Group revenues

2,336.5

2,482.4

6.2%

2,246.9

2,941.5

30.9%

EBITDA

80.2

82.3

2.6%

52.2

63.0

20.7%

Underlying EBIT

59.7

61.1

2.3%

32.4

40.0

23.4%

Underlying PBT

50.1

50.2

0.1%

22.8

25.0

9.4%

EPS – underlying continuing (p)

50.4

50.4

0.1%

22.9

25.1

9.4%

DPS (p)

13.3

13.3

0.0%

8.6

8.6

0.0%

Adjusted net debt/(cash)

(44.6)

(10.0)

-77.7%

(33.3)

(15.6)

-53.0%

Source: Edison Investment Research estimates

Exhibit 3: Financial summary

£m

2018

2019

2020

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,186.9

2,276.1

2,154.4

2,482.4

2,941.5

Cost of Sales

(1,933.6)

(2,015.3)

(1,916.2)

(2,182.6)

(2,615.0)

Gross Profit

253.2

260.8

238.2

299.8

326.5

EBITDA

 

 

52.3

52.0

53.4

82.3

63.0

Operating Profit (before amort. and except).

 

 

34.3

32.0

31.1

61.1

40.0

Intangible Amortisation

(0.3)

(0.4)

(0.2)

(0.2)

(0.3)

Exceptionals

(6.7)

(2.4)

(0.6)

1.0

(5.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

27.3

29.2

30.3

61.9

34.7

Net Interest

(9.6)

(9.9)

(10.2)

(10.9)

(15.1)

Profit Before Tax (norm)

 

 

24.7

22.1

20.9

50.2

25.0

Profit Before Tax (FRS 3)

 

 

17.7

19.2

20.1

51.0

19.7

Tax

(4.7)

(4.1)

(6.4)

(11.0)

(4.3)

Profit After Tax (norm)

20.5

17.9

16.5

39.4

19.6

Profit After Tax (FRS 3)

13.1

15.2

13.7

40.0

15.4

Average Number of Shares Outstanding (m)

77.7

78.2

78.2

78.2

78.2

EPS - normalised (p)

 

 

26.3

22.9

21.1

50.4

25.1

EPS - normalised and fully diluted (p)

 

 

25.5

22.6

20.6

49.5

24.6

EPS - (IFRS) (p)

 

 

16.8

19.4

17.5

51.1

19.7

Dividend per share (p)

8.54

2.85

0.00

13.30

8.55

Gross Margin (%)

11.6

11.5

11.1

12.1

11.1

EBITDA Margin (%)

2.4

2.3

2.5

3.3

2.1

Operating Margin (before GW and except.) (%)

1.6

1.4

1.4

2.5

1.4

BALANCE SHEET

Fixed Assets

 

 

262.9

390.2

378.2

498.3

501.4

Intangible Assets

112.2

119.3

119.5

163.6

163.7

Tangible Assets

150.7

162.9

159.8

215.4

218.3

Right of use asset

108.0

98.8

119.3

119.3

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

466.3

560.5

464.8

645.8

667.7

Stocks

384.0

470.7

362.9

487.9

500.1

Debtors

71.9

79.2

59.6

109.4

117.7

Cash

1.2

0.1

33.8

38.8

38.8

Other

9.2

10.6

8.5

9.6

11.1

Current Liabilities

 

 

(502.2)

(608.4)

(494.1)

(691.0)

(712.7)

Creditors

(501.5)

(582.8)

(493.4)

(691.0)

(712.7)

Short term borrowings

(0.6)

(25.6)

(0.6)

0.0

0.0

Long Term Liabilities

 

 

(30.8)

(139.9)

(133.0)

(178.5)

(172.8)

Long term borrowings

(5.7)

(5.0)

(4.4)

(28.9)

(23.2)

Lease Liabilities

0.0

(108.1)

(99.3)

(119.7)

(119.7)

Other long-term liabilities

(25.2)

(26.8)

(29.3)

(29.9)

(29.9)

Net Assets

 

 

196.3

202.3

215.9

274.7

283.6

CASH FLOW

Operating Cash Flow

 

 

39.2

43.6

87.5

95.2

43.4

Net Interest

(2.1)

(1.0)

(1.0)

(1.7)

(1.7)

Tax

(4.7)

(4.1)

(6.4)

(11.0)

(4.3)

Capex

(23.4)

(19.5)

(11.7)

(20.7)

(17.1)

Acquisitions/disposals

1.6

(27.4)

(0.6)

(74.7)

0.0

Financing

(1.0)

(0.9)

0.0

0.0

0.0

Dividends

(5.0)

(7.2)

0.0

(6.9)

(5.7)

Other

(7.6)

(9.0)

(8.4)

1.0

(9.0)

Net Cash Flow

(2.9)

(25.4)

59.4

(18.9)

5.7

Opening adjusted net debt/(cash)

 

 

2.2

5.1

30.6

(28.8)

(10.0)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Closing adjusted net debt/(cash)

 

 

5.1

30.6

(28.8)

(10.0)

(15.6)

Net financial liabilities (including lease liabilities)

138.6

70.5

109.7

104.1

Source: Company reports, Edison Investment Research estimates


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This report has been commissioned by Marshall Motor Holdings and prepared and issued by Edison, in consideration of a fee payable by Marshall Motor Holdings. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Marshall Motor Holdings and prepared and issued by Edison, in consideration of a fee payable by Marshall Motor Holdings. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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