Lower profitability in Q3

Stern Groep 18 November 2020 Update
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Stern Groep

Lower profitability in Q3

Company update

Automobiles & parts

18 November 2020

Price

€11.60

Market cap

€66m

Net debt (€m) at H120

82

Shares in issue

5.7m

Free float

29.5%

Code

STRN

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.7)

19.6

(7.9)

Rel (local)

(10.8)

12.0

(8.2)

52-week high/low

€17.90

€7.92

Business description

Stern Groep is one of the largest automotive groups in the Netherlands. With 75 locations and revenues of almost €1bn it is the second largest car retailer group in the Netherlands. The company has over 1,850 employees.

Next events

FY20 results

4 March 2021

Analyst

Edwin De Jong

+44 (0)20 3077 5700

Stern reported a 5% reduction in revenues in its Q3 trading update. Profitability lagged, especially because of COVID-19 related effects in workshop utilisation and car repair. Stern did not use the Dutch government support package NOW2 in Q3, but is considering making use of NOW3, which could have an impact on the performance for the rest of the year. We have made small downward changes to our FY20 estimates on the back of the Q3 results, but maintain our 2021 estimates as we continue to expect a recovery post COVID-19. At an FY21e P/E of 9.4x that implies a 27% discount to peers, Stern still looks undervalued.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

987.7

(5.8)

(0.73)

0.00

N/A

N/A

12/19

989.3

(1.4)

0.29

3.50

N/A

30.2

12/20e

815.5

0.6

1.00

0.30

11.6

2.6

12/21e

922.8

7.8

1.23

0.49

9.4

4.2

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

A weaker Q3 leads to lower FY20e earnings

Stern’s Q3 revenues were in line with our expectations, while the loss after tax was below our estimates in the seasonally weak third quarter. This was largely because Stern did not use NOW2 government support during the quarter, but also due to lower gross margins, mainly driven by car services (less car accidents) and lower utilisation at workshops (less maintenance). Stern did not provide Q4 guidance given current uncertainties, but we expect it to be a stronger quarter compared to Q3 and at present see no reason to change our revenue estimates for FY20. That said, we have reduced our underlying FY20e EBIT estimate to €5.1m from €7.5m and our net profit estimate to €5.7m from €7.4m.

No news on Hedin and Renault expansion

An important element in Stern’s investment case is the merger discussions with Hedin, and talks are still ongoing but are protracted due to travel restrictions. As a result, we do not expect these discussions to conclude this year. There was also no news on the desired expansion of Renault dealerships in the south of the Netherlands, but we expect this deal could materialise in the short term.

Valuation: Attractive despite FY20e downgrade

Despite the weaker Q320 and lower FY20e estimates, we still believe that Stern’s profitability could recover towards 1.3% EBIT margins in FY21e as COVID-19 effects become less pronounced and the 2020 investments in restructuring and the online repositioning of One Stern bear fruit. Trading at a P/E multiple of 9.4x on our unchanged FY21 estimates compared to the peer group average of 12.8x, the stock continues to look undervalued. On top of this, Stern has a participation in car insurer Bovemij that has a market value of €3.17 per Stern share.

Stern Groep is a research client of Edison Investment Research Limited

Q3 results: Solid revenues, but more margin pressure

Although Q320 new passenger car sales in the Netherlands, recovered from the 30% y-o-y decrease in H120 to a 15% decrease (source: Bovag), the market environment is still far from being favourable. Used car sales were stronger in the quarter (+6.8% y-o-y; source: VWE), while new light commercial vehicles sales were weaker (-9.0% y-o-y; source: Bovag). We estimate that year to date, Stern has won some market share in new passenger cars (4.3% from 4.1%), while losing share in light commercial vehicles (6.3% from 7.2%). All in all, Stern’s top line dropped 5% to €198m in Q320, which we believe is a reasonable outcome given the challenging market conditions. For the full year, sector organisations Bovag and Aumacon expect a 22% decrease to 350,000 new passenger car sales and Aumacon expects a rebound to 415,000 new passenger cars by 2021.

The company’s gross margins are still under pressure due to lower utilisation at the workshops, as cars making less miles in these mobility restricted COVID-19 times require less maintenance, and also at car repair facilities, as there are fewer accidents due to lower traffic. However, operational costs came down as well, as a result of restructuring with 3.2% lower staffing costs and 8.4% lower operational costs, despite rebranding to One Stern and the implementation of a CRM software package. Stern has not made use of grants from the Dutch government support program NOW2 (after tapping almost €5m from NOW1) according to the Q320 results, but is considering applying for NOW3 grants, which will run into next year. The adjusted loss after taxes from continued activities increased to €2.0m in Q320 from €0.8m in Q319.

Estimates revisions: Lower FY20, FY21 maintained

We maintain our expectation that Stern will report revenues of €815.5m in FY20, a 17% y-o-y reduction. This is driven by the sharp reduction in new car sales and the divestment of Heron, partly offset by some normalisation of revenues in Q420 and a strong increase in electric vehicle (EV) model sales in December, especially the Volvo XC40 and KIA Niro. The latter is driven by a beneficial income tax regime this year compared to next year, which spurs lease car sales in December for delivery in January.

Nevertheless, the anticipated improvement in adjusted EBIT, which we initially expected to come in at €7.5m in FY20, is now expected to be somewhat lower at €5.1m, due to lower gross margins and higher operating costs then we previously expected. As a result, we also lower our FY20 estimate of an adjusted net profit (adjusted for €20m impairment of goodwill and €4m appreciation of the stake in insurer Bovemij) from €7.4m to €5.7m.

We currently keep our FY21 estimates unchanged and continue to expect a rebound in revenues to €0.9bn, as the effects of COVID-19 reverse, with a subsequent anticipated return to the pre COVID-19 revenue level of €1bn by 2023. EBITDA and EBIT should benefit significantly from the ongoing improvements in the dealer model and we expect that a 1.3% EBIT margin should still be achievable in 2021 rising to 1.9% by 2023.

Exhibit 1: P&L

Year end 31 December, €m

2016

2017

2018

2019

2020e
old

2020e
new

2021e
old

2021e
new

Revenue

1,096.9

1,124.5

988.7

989.3

815.5

815.5

922.8

922.8

Cost of Sales

(907.9)

(934.2)

(812.3)

(816.5)

(681.8)

(684.2)

(770.3)

(770.3)

Gross Profit

189.0

190.3

176.4

172.8

133.7

131.3

152.5

152.5

EBITDA

26.7

20.5

6.1

47.4

14.4

11.7

17.8

17.8

Normalised operating profit

16.5

11.4

(1.7)

5.5

7.5

5.1

12.3

12.3

Amortisation of acquired intangibles

0.0

0.0

(0.1)

(0.1)

0.0

0.0

0.0

0.0

Exceptionals

2.2

1.3

0.2

(2.8)

(18.0)

(18.3)

0.0

0.0

Reported operating profit

18.7

12.7

(1.5)

2.7

(10.5)

(13.2)

12.3

12.3

Net Interest

(3.4)

(3.3)

(4.1)

(6.9)

(4.5)

(4.5)

(4.5)

(4.5)

Profit Before Tax (norm)

13.1

8.1

(5.8)

(1.4)

3.0

0.6

7.8

7.8

Profit Before Tax (reported)

15.3

9.4

(5.6)

(4.2)

(15.0)

(17.7)

7.8

7.8

Reported tax

(4.0)

(1.9)

1.7

3.0

4.4

5.1

(0.8)

(0.8)

Profit After Tax (norm)

9.1

6.2

(4.1)

1.6

7.4

5.7

7.0

7.0

Profit After Tax (reported)

11.3

7.5

(4.0)

(1.2)

(10.6)

(12.6)

7.0

7.0

Discontinued operations

0.0

0.0

4.5

22.6

0.0

0.0

0.0

0.0

Net income (normalised)

9.1

6.2

(4.1)

1.6

7.4

5.7

7.0

7.0

Net income (reported)

11.3

7.5

0.5

21.3

(10.6)

(12.6)

7.0

7.0

Source: Stern Groep, Edison Investment Research estimates

Valuation: Investment case remains intact

After the cyclical trough in 2016, Dutch new car sales started to pick up again in 2017 and 2018, which were followed by a difficult 2019. 2020 was looking better again driven by improved consumer confidence until COVID-19 hit. Valuations dropped fast in the face of the pandemic and Stern's share price declined from around €17 to a low of €7.9, but has since recovered to €11.60 at the time of writing.

Downturns tend to be opportunities to invest in car dealerships, especially those that are likely to emerge stronger. Stern is well positioned to weather the current storm with its significantly restructured organisation. Its valuation is undemanding at 9.4x 2021e P/E and there is additional optionality in light of a potential merger with much larger Swedish automotive group Hedin.

Stern is currently trading at a 27% discount to the European peer group on FY21e P/E and a 3% discount on FY21e EV/EBITDA (excluding its stake in Bovemij). However, noting the difference in capital structures and quality of the balance sheets of the peer group companies, we see P/E as a more relevant valuation metric for the sector. Nordic peers trade at an average FY19 P/B of more than 3x versus Stern’s 0.5x. All in all, we believe Stern is conservatively valued given its transparent and significantly impaired balance sheet.

Exhibit 2: Peer group valuation

 

Market cap

P/E (x)

P/B (x)

EV/EBITDA (x)

Company

(m)

2019

2020e

2021e

2019

2020e

2021e

2019

2020e

2021e

Bilia

SEK13,084

15.2

12.8

12.6

4.3

3.4

3.0

7.7

8.1

8.0

Kamux

€519

27.0

25.8

20.0

6.4

5.5

4.7

16.3

14.4

12.6

Marshall Motors

£107

5.9

9.3

9.6

0.5

0.6

0.6

4.8

5.4

5.5

Pendragon

£190

N/A

66.7

9.0

1.1

1.6

1.6

5.5

6.3

4.7

Peer average

16.0

28.6

12.8

3.0

2.8

2.5

8.6

8.5

7.7

Stern

€66

N/A

11.6

9.4

0.5

0.5

0.5

3.1

10.4

7.5

Premium/(discount)

N/A

-59%

-27%

-82%

-83%

-81%

-64%

22%

-3%

Source: Stern, Refinitiv, Edison Investment Research. Note: Prices as at17 November 2020.


Exhibit 3: Financial summary

2016

2017

2018

2019

2020e

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

1,096.9

1,124.5

988.7

989.3

815.5

922.8

955.9

987.9

Cost of Sales

(907.9)

(934.2)

(812.3)

(816.5)

(684.2)

(770.3)

(795.8)

(819.9)

Gross Profit

189.0

190.3

176.4

172.8

131.3

152.5

160.1

167.9

EBITDA

26.7

20.5

6.1

47.4

11.7

17.8

21.0

24.3

Normalised operating profit

16.5

11.4

(1.7)

5.5

5.1

12.3

15.3

18.3

Amortisation of acquired intangibles

0.0

0.0

(0.1)

(0.1)

0.0

0.0

0.0

0.0

Exceptionals

2.2

1.3

0.2

(2.8)

(18.3)

0.0

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

18.7

12.7

(1.5)

2.7

(13.2)

12.3

15.3

18.3

Net Interest

(3.4)

(3.3)

(4.1)

(6.9)

(4.5)

(4.5)

(4.5)

(4.5)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

13.1

8.1

(5.8)

(1.4)

0.6

7.8

10.8

13.8

Profit Before Tax (reported)

15.3

9.4

(5.6)

(4.2)

(17.7)

7.8

10.8

13.8

Reported tax

(4.0)

(1.9)

1.7

3.0

5.1

(0.8)

(1.5)

(2.2)

Profit After Tax (norm)

9.1

6.2

(4.1)

1.6

5.7

7.0

9.3

11.6

Profit After Tax (reported)

11.3

7.5

(4.0)

(1.2)

(12.6)

7.0

9.3

11.6

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

4.5

22.6

0.0

0.0

0.0

0.0

Net income (normalised)

9.1

6.2

(4.1)

1.6

5.7

7.0

9.3

11.6

Net income (reported)

11.3

7.5

0.5

21.3

(12.6)

7.0

9.3

11.6

Basic average number of shares outstanding (m)

6

6

6

6

6

6

6

6

Average number of shares outstanding

5.68

5.68

5.68

5.68

5.68

5.68

5.68

5.68

 

 

 

 

 

 

 

 

 

EPS (€)

1.99

1.32

0.09

3.76

(2.23)

1.23

1.64

2.05

Normalised EPS (€)

1.60

1.09

(0.73)

0.29

1.00

1.23

1.64

2.05

DPS (€)

1.00

1.00

0.00

3.50

0.30

0.49

0.66

0.82

Revenue growth (%)

-2.9

2.5

(12.1)

0.1

(17.6)

13.2

3.6

3.3

Gross Margin (%)

17.2

16.9

17.8

17.5

16.1

16.5

16.7

17.0

EBITDA Margin (%)

2.4

1.8

0.6

4.8

1.4

1.9

2.2

2.5

Normalised Operating Margin (%)

1.5

1.0

-0.2

0.6

0.6

1.3

1.6

1.9

BALANCE SHEET

Fixed Assets

345.0

362.2

391.8

278.6

285.9

287.7

288.7

288.7

Intangible Assets

30.0

30.5

30.6

22.4

22.3

22.3

22.3

22.3

Tangible Assets

280.3

297.1

343.1

243.5

250.9

252.7

253.7

253.7

Investments & other

34.7

34.6

18.1

12.7

12.7

12.7

12.7

12.7

Current Assets

278.9

262.7

283.6

294.8

222.7

232.4

240.8

250.4

Stocks

222.8

227.2

237.6

201.4

163.1

184.6

191.2

197.6

Debtors

47.6

24.6

35.3

41.7

32.6

32.3

33.5

34.6

Cash & cash equivalents

1.0

1.2

0.7

0.7

19.6

7.2

7.6

9.3

Other

7.5

9.7

10.0

51.0

7.3

8.3

8.6

8.9

Current Liabilities

456.8

255.9

272.6

271.7

223.8

230.9

234.6

237.1

Creditors

133.1

134.4

139.9

97.4

101.3

104.0

103.5

106.6

Tax and social security

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Short term borrowings

292.8

97.7

93.9

90.0

90.0

90.0

91.0

91.0

Other

30.9

23.9

38.8

84.3

32.6

36.9

40.1

39.5

Long Term Liabilities

10.0

209.8

247.6

149.1

146.5

146.8

146.9

147.0

Long term borrowings

6.3

206.4

244.0

49.7

49.7

49.7

49.7

49.7

Other long term liabilities

3.7

3.4

3.6

99.4

96.8

97.1

97.2

97.3

Net Assets

157.0

159.1

155.2

152.6

138.2

142.4

148.0

155.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

157.0

159.1

155.2

152.6

138.2

142.4

148.0

155.0

CASH FLOW

Op Cash Flow before WC and tax

55.5

53.6

52.6

11.9

(10.3)

12.9

15.1

17.6

Working capital

(1.9)

10.7

(0.9)

(8.3)

43.2

(15.1)

(5.4)

(5.3)

Net operating cash flow

53.6

64.4

51.6

3.6

32.9

(2.2)

9.8

12.3

Capex

(49.9)

(63.7)

(81.6)

26.6

(12.2)

(7.4)

(6.7)

(5.9)

Dividends

0.0

0.0

(4.3)

(19.9)

(1.7)

(2.8)

(3.7)

(4.6)

Other

(3.3)

(0.4)

33.7

(10.4)

0.0

0.0

0.0

0.0

Net Cash Flow

0.4

0.2

(0.5)

(0.1)

19.0

(12.4)

(0.7)

1.8

Opening net debt/(cash)

295.8

298.1

302.9

337.1

139.0

120.0

132.5

133.1

Closing net debt/(cash)

298.1

302.9

337.1

139.0

120.0

132.5

133.1

131.4

Source: Stern Groep, Edison Investment Research


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