Marshall Motor Holdings — COVID bites but well placed for recovery

H120 proved to be as challenging for automotive retailers as it could have been, with retail operations closed during lockdown from late March to early June and only essential service operations to support vehicles for key workers being maintained. In Q120, UK new car registrations were down 31.0% reflecting the loss of a week’s trading in March, with April falling by 97.3% and May by 89.0%. Although June saw some improvement with a 34.9% year-on-year decline, the aggregate UK new car market in H120 was 48.5% below H119.

Against this backdrop, MMH performed creditably, as management maintained its focus on mitigating the impact and protecting cash performance. Overall, management estimates the impact of COVID-19 to have been £26.3m at the profit before tax level, which would have been significantly worse had it not been for the government’s Coronavirus Job Retention Scheme (CJRS) furlough support and other support measures, including help from manufacturing partners.

The key financial highlights are shown in Exhibit 1 below.

Ahead of lockdown trading had been encouraging but with the precipitous market drop as showrooms closed there was a significant financial impact. MMH’s H120 like-for-like new car unit sales were down 37.7%, with similar declines in retail and fleet sales (against market declines of 44.5% and 51.7% respectively. Used car like-for-like unit sales fared slightly better, declining 31.8% although the UK market fell by 28.7%. Aftersales like-for-like revenues fell by 28.5%, which appears robust given lockdown for over a third of the period, although 62 operations remained open for essential servicing.

Adjusting for portfolio changes, like-for-like revenues fell by 30.9% to £798.4m, with dealerships acquired or opened in 2019 adding £96.9m net of closures. On a like-for-like basis, new car revenues fell 32.5% £377.6m with total new car revenue of £417.4m (H119: £569.1m). Used car like-for-like revenues were £348.4m, down 29.6%, with total revenue for H120 of £395.6m (H119: £509.6m). Total aftersales revenues were £100.3m (H119: £129.5m), a 28.5% like-for-like decline.

Group gross profit margins fell to 10.6% (H119: 11.4%), affected by volume-related income, primarily reduced manufacturer bonus payments due to unit sales. Used car gross profit margins also declined to 6.1% (H119: 6.6%), reflecting management actions to reduce stocks at the onset of the pandemic and a lower proportion of used vehicles being sold during lockdown on finance packages. Despite making a small loss during the lockdown period, the Aftersales business actually improved gross margin to 45.0% (H119: 44.6%).

Underlying operating expenses decreased by 24% to £98.8m (H119: £114.9m) including £10.7m from acquired businesses. With up to 90% of staff on furlough during the lockdown, the CJRS contributed £16.4m, although the group did top up furloughed pay by £1.8m which was included in non-underlying items. The scheme continues until the end of October with a 25% contribution from employers, but around 90% of MMH staff are now back working. In addition, the business rates holiday reduced cost of premises by £2.3m and continues to March 2021. MMH’s own actions contained costs further including lower marketing, transportation and property costs, as well as senior management voluntary pay reductions.

The group made an underlying operating loss of £3.6m (H119 operating profit: £20.2m). Finance costs rose slightly to £5.3m (H119: 5.0m) due to higher consignment stock levels following the 2019 acquisitions, as well as a precautionary drawdown of the revolving credit facility (RCF).

As part of the cash protection measures, non-essential capex was deferred where possible, and at £4.7m was below management’s own expectation and represented a saving of around £5m. MMH also benefited from £24.3m of vehicle stocking payments from brand partners that reduced working capital. In addition, VAT payments of £10.0m were deferred under the government scheme, with a £2.8m historic credit also reclaimed. The absence of a final dividend saved £4.5m, the sale of a freehold property in Leicester generated £2.8m and various rental adjustments agreed with landlords saved £1.5m.

The result was that the group finished H120 with adjusted net funds (excluding leases) of £27.4m compared to net debt of £30.6m at the start of the year. While much of the benefit will unwind in H220, we still expect an overall reduction in adjusted net debt during 2020. End-June 2020 leases were higher than at end June 2019 due to acquisitions.

The company also agreed an extension to its £120m RCF to January 2023, with revised covenants until December 2020 with a review possible in 2021 depending on trading conditions. The margin on the revised facility has increased in line with market conditions. At end June, the RCF was undrawn and remains so.

MMH is well positioned to pursue its growth strategy, identifying the brands where it wishes to strengthen and seeking opportunities to act as a consolidator able to improve returns on investment. New opportunities are likely to present themselves. The pandemic is likely to lead to further consolidation of car manufacturers as well as among UK car retailers, supporting the trend to fewer, larger dealership groups as investment requirements increase. MMH appears well positioned to participate in further consolidation.

The freehold property base of £123.9m was up £3m on the prior year, largely due to the acquisitions.

The second half of 2020 actually looks set to benefit from a rebound in demand across most business segments as a return to a form of normality releases pent-up demand from the lockdown period. The problem facing automotive retailers is that there is a myriad of potential scenarios for FY21 and beyond, with a relatively low probability of any one occurring. As well as potential further disruption from COVID (including potential lockdowns affecting localities as well as supplier factories), there is the small matter pf Brexit at the end of 2020. In addition, lockdown has exposed potential market behaviour changes, including acceleration of greener vehicle use.

We have made a central forecast based on the most recent SMMT forecast for FY21 released in July 2020 in terms of the new car market. It estimates new car registrations of 2.04m units, 12% below 2019 levels. It seems likely that the used car market may prove to be more robust, although the availability of quality used cars may increase relative to demand, which could affect margins on resale, although these are currently expected to remain stable. Aftersales will certainly benefit from the deferred servicing and MOT certification in H220, and a return to more normal levels during FY21.

New and used car market demand is likely to be affected by levels of UK unemployment, which will be driven by rate of return to as close to normality as possible. Without a vaccine we assume this occurs progressively through 2022. There may be the potential for a shift of model mix if demand for private transport holds up due to lack of confidence in public options. We feel it is likely to favour cheaper utilitarian models over premium. However, demand in both retail and aftersales should be supported by time-limited finance contracts, which provide regular maintenance points and flow of replacement vehicles.

We assume MMH achieves a 10% improvement in FY21 in new and used car volumes, with new car revenues recovering to 11% below FY19 levels and 7% below FY19 for used. We also assume aftersales revenues almost recover to FY19 levels.

While management is giving no guidance beyond the end of the current year, we are restoring our estimates as per Exhibit 3 below, including FY21. As already noted, we believe there are a wide range of outcomes for next year. We estimate that a volume decline double what we are assuming (c 20%) for retail could reduce FY21 PBT to close to break-even in the absence of further support schemes or mitigating actions from management.

We do not expect a final dividend to be paid, with a potential resumption in FY21 contingent on market conditions.