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Research: Industrials
For Marshall Motor Holdings (MMH), the favourable mix of trading conditions for automotive retailers has continued through Q321 despite intensifying supply constraints as the global chip shortage disrupted production at car producers. Delivery lead times are extended, with strong margins for new cars and at unprecedented levels in the used car segment, leading to an excellent profit performance despite lower volumes. Management has again increased guidance for the current year profit to not less than £50m. While there is no certainty as to when trading conditions will normalise, we expect margins to moderate in FY22 as car supply improves. We have raised our FY21 EPS estimate by 25%, with no increase in FY22. A single-digit FY22e P/E multiple of just 9.1x does not look demanding as we expect markets to normalise and growth to resume in FY23.
Written by
Marshall Motor Holdings |
Continued strong performance in Q321 |
Q3 trading update |
Automotive retailers |
6 October 2021 |
Share price performance
Business description
Next events
Analyst
Marshall Motor Holdings is a research client of Edison Investment Research Limited |
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For Marshall Motor Holdings (MMH), the favourable mix of trading conditions for automotive retailers has continued through Q321 despite intensifying supply constraints as the global chip shortage disrupted production at car producers. Delivery lead times are extended, with strong margins for new cars and at unprecedented levels in the used car segment, leading to an excellent profit performance despite lower volumes. Management has again increased guidance for the current year profit to not less than £50m. While there is no certainty as to when trading conditions will normalise, we expect margins to moderate in FY22 as car supply improves. We have raised our FY21 EPS estimate by 25%, with no increase in FY22. A single-digit FY22e P/E multiple of just 9.1x does not look demanding as we expect markets to normalise and growth to resume in FY23.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/19 |
2,276 |
22.1 |
22.9 |
2.85 |
9.1 |
1.4 |
12/20 |
2,154 |
20.9 |
21.1 |
0.00 |
9.9 |
N/A |
12/21e |
2,337 |
50.1 |
50.4 |
13.30 |
4.1 |
6.4 |
12/22e |
2,247 |
22.8 |
22.9 |
8.55 |
9.1 |
4.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Outperformance in new cars continues
MMH continued to outperform challenging new car markets in Q321. The new car supply constraints caused by production cuts as the global microchip shortage bites harder were reflected in UK new car registrations. These fell 34% year-on-year in September 2021 and by 31% in Q321 versus Q320, when sales benefited from the release of pent-up demand following the end of the first national lockdown. MMH like-for-like new vehicle unit sales outperformed the market by 13% in volume terms in Q321 and by almost 12% year to date (UK market still +5.9%). The company has continued to invest in its omnichannel offering, procurement processes and technology, as well as increased marketing to optimise returns.
Exceptional used car margins achieved
The scarcity of supply led to favourable pricing and margins for new cars. The situation remains even more positive in used car markets where values continued to rise sharply through Q321, increasing by an average of 12.7%. Used car values have progressively risen by an unprecedented 26.3% in the last seven months. Margin performance in both the new and used segments has more than offset lower volumes in the period. However, the longer the supply constraints persist, the more challenging trading is likely to become and as supply eases, margins may moderate further.
Valuation: Supportive yield
While the rating looks undemanding, the FY22e yield looks very supportive as the wait for a return to more normal markets continues. We expect to see multiple expansion as a return to profitable growth is anticipated from FY23.
Earnings revisions
The exceptionally positive profit performance in FY21 is a result of distorted market conditions, which have persisted even as the pandemic has become more manageable. Management has continued to capitalise on these favourable tailwinds and expects to achieve a stable Q421 performance despite increasing new car supply shortages, which are leading to an increasingly tight used car market as contract renewal decisions are deferred due to extended new car delivery lead times, many of which extend well into 2022.
As conditions should revert to normal assuming the supply chain issues are resolved, we expect more normal market conditions to reassert themselves. While underlying demand appears to be strong, the margin reversion is likely to be significant, although when and by how much remains extremely uncertain.
As a result, the strong FY21 performance, as reflected in our increased estimates below, still appears likely to be followed by a return to more normal levels of trading and profitability in FY22, although the improved cash performance in FY21 should be retained. The balance sheet thus remains well positioned to take advantage of any value-creating investment opportunities that might arise.
Exhibit 1: Marshall Motor Holdings revisions to earnings estimates
Year to December (£m) |
2021e |
2022e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
New Car |
1,008.3 |
1,008.3 |
0.0% |
978.1 |
978.1 |
0.0% |
Used Car |
1,107.1 |
1,107.1 |
0.0% |
1,045.6 |
1,045.6 |
0.0% |
Aftersales |
267.1 |
267.1 |
0.0% |
269.7 |
269.7 |
0.0% |
Intra group |
(45.9) |
(45.9) |
0.0% |
(46.5) |
(46.5) |
0.0% |
Group revenues |
2,336.5 |
2,336.5 |
0.0% |
2,246.9 |
2,246.9 |
0.0% |
|
|
|
|
|
|
|
EBITDA |
70.3 |
80.2 |
14.1% |
52.2 |
52.2 |
0.0% |
Underlying operating profit |
49.9 |
59.7 |
19.8% |
32.4 |
32.4 |
0.0% |
Underlying PBT |
40.2 |
50.1 |
24.8% |
22.8 |
22.8 |
0.0% |
|
|
|
|
|
|
|
EPS - underlying (p) |
40.3 |
50.4 |
24.8% |
22.9 |
22.9 |
0.0% |
DPS (p) |
13.3 |
13.3 |
0.0% |
8.6 |
8.6 |
0.0% |
Adjusted net debt/(cash) |
(36.8) |
(44.6) |
21.3% |
(25.4) |
(33.3) |
30.8% |
Source: Edison Investment Research estimates
Exhibit 2: 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 |
2,336.5 |
2,246.9 |
Cost of Sales |
(1,933.6) |
(2,015.3) |
(1,916.2) |
(2,054.3) |
(1,997.5) |
||
Gross Profit |
253.2 |
260.8 |
238.2 |
282.2 |
249.4 |
||
EBITDA |
|
|
52.3 |
52.0 |
53.4 |
80.2 |
52.2 |
Operating Profit (before amort. and except). |
|
|
34.3 |
32.0 |
31.1 |
59.7 |
32.4 |
Intangible Amortisation |
(0.3) |
(0.4) |
(0.2) |
(0.2) |
(0.3) |
||
Exceptionals |
(6.7) |
(2.4) |
(0.6) |
1.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
27.3 |
29.2 |
30.3 |
60.6 |
32.2 |
||
Net Interest |
(9.6) |
(9.9) |
(10.2) |
(9.6) |
(9.6) |
||
Profit Before Tax (norm) |
|
|
24.7 |
22.1 |
20.9 |
50.1 |
22.8 |
Profit Before Tax (FRS 3) |
|
|
17.7 |
19.2 |
20.1 |
51.0 |
22.5 |
Tax |
(4.7) |
(4.1) |
(6.4) |
(11.0) |
(4.9) |
||
Profit After Tax (norm) |
20.5 |
17.9 |
16.5 |
39.4 |
17.9 |
||
Profit After Tax (FRS 3) |
13.1 |
15.2 |
13.7 |
40.0 |
17.6 |
||
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 |
22.9 |
EPS - normalised and fully diluted (p) |
|
|
25.5 |
22.6 |
20.6 |
49.4 |
22.5 |
EPS - (IFRS) (p) |
|
|
16.8 |
19.4 |
17.5 |
51.1 |
22.5 |
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 |
3.4 |
2.3 |
||
Operating Margin (before GW and except.) (%) |
1.6 |
1.4 |
1.4 |
2.6 |
1.4 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
262.9 |
390.2 |
378.2 |
392.1 |
396.7 |
Intangible Assets |
112.2 |
119.3 |
119.5 |
120.6 |
120.7 |
||
Tangible Assets |
150.7 |
162.9 |
159.8 |
172.2 |
176.6 |
||
Right of use asset |
108.0 |
98.8 |
99.3 |
99.3 |
|||
Investments |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
466.3 |
560.5 |
464.8 |
480.9 |
525.5 |
Stocks |
384.0 |
470.7 |
362.9 |
346.5 |
404.4 |
||
Debtors |
71.9 |
79.2 |
59.6 |
79.4 |
76.4 |
||
Cash |
1.2 |
0.1 |
33.8 |
45.8 |
35.8 |
||
Other |
9.2 |
10.6 |
8.5 |
9.1 |
8.8 |
||
Current Liabilities |
|
|
(502.2) |
(608.4) |
(494.1) |
(496.5) |
(533.1) |
Creditors |
(501.5) |
(582.8) |
(493.4) |
(496.5) |
(533.1) |
||
Short term borrowings |
(0.6) |
(25.6) |
(0.6) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(30.8) |
(139.9) |
(133.0) |
(130.8) |
(132.1) |
Long term borrowings |
(5.7) |
(5.0) |
(4.4) |
(1.2) |
(2.6) |
||
Lease Liabilities |
0.0 |
(108.1) |
(99.3) |
(99.7) |
(99.7) |
||
Other long-term liabilities |
(25.2) |
(26.8) |
(29.3) |
(29.9) |
(29.9) |
||
Net Assets |
|
|
196.3 |
202.3 |
215.9 |
245.7 |
256.9 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
39.2 |
43.6 |
87.5 |
71.4 |
23.9 |
Net Interest |
(2.1) |
(1.0) |
(1.0) |
(1.7) |
(0.3) |
||
Tax |
(4.7) |
(4.1) |
(6.4) |
(11.0) |
(4.9) |
||
Capex |
(23.4) |
(19.5) |
(11.7) |
(16.8) |
(15.3) |
||
Acquisitions/disposals |
1.6 |
(27.4) |
(0.6) |
(10.2) |
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) |
(9.0) |
(9.0) |
||
Net Cash Flow |
(2.9) |
(25.4) |
59.4 |
15.8 |
(11.4) |
||
Opening adjusted net debt/(cash) |
|
|
2.2 |
5.1 |
30.6 |
(28.8) |
(44.6) |
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) |
(44.6) |
(33.3) |
Net financial liabilities (including lease liabilities) |
138.6 |
70.5 |
55.1 |
66.4 |
Source: Company reports, Edison Investment Research estimates
|
|
Research: Consumer
Gregg’s Q321 trading statement (to 2 October) indicated improved revenue momentum despite recent supply chain and staffing disruptions and an increase in FY21 profit expectations, although rising inflationary pressures (ingredients, staff and utilities) are expected from Q421. This suggests a more challenging FY22 from a cost perspective. Management set a new ‘ambitious’ five-year target (to the end of FY26) to double revenue to £2.4bn (CAGR of 14–15%) from an equal combination of accelerated space growth (number and average size of stores) to reach at least 3,000 stores and space productivity from both ongoing (delivery and evening day part) and new (enhanced loyalty and marketing) initiatives. Simply put, the ambition is to extend Greggs’ strength from daytime retail to an all-day multichannel. Our forecasts are under review.