Marshall Motor Holdings — COVID bites but well placed for recovery

Marshall Motor Holdings (LN: MMH)

Last close As at 18/05/2024

394.00

0.00 (0.00%)

Market capitalisation

308m

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Research: Industrials

Marshall Motor Holdings — COVID bites but well placed for recovery

Marshall Motor Holdings’ (MMH) H120 results were severely disrupted by the pandemic, as was the whole UK auto retail sector. Despite a strong Q120 and continued outperformance of the new car market, management had anticipated an H120 underlying loss before tax, which was duly recorded at £8.9m. FY20 management guidance for a near break-even performance is encouraging as recovery is already apparent in increased June and July activity levels. With a strong half-year cash position, MMH is positioned to pursue its growth strategy as the momentum of recovery builds into FY21.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Marshall Motor Holdings

COVID bites but well placed for recovery

Interim results

Automobiles & parts

19 August 2020

Price

120p

Market cap

£94m

Net cash (£m) at 30 June 2020

27.4

Shares in issue

78.2m

Free float

35%

Code

MMH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.0

20.8

(11.0)

Rel (local)

4.6

18.4

2.3

52-week high/low

158p

85p

Business description

Marshall Motor is the seventh largest UK motor retailer, operating 117 franchises spread across 24 brands in 28 counties. It is one of six UK dealership groups that represent each of the top five volume and premium brands. The group has a strong presence in eastern and southern England.

Next events

Q3 trading update

October 2019

Analyst

Andy Chambers

+44 (0)20 3681 2525

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

Marshall Motor Holdings’ (MMH) H120 results were severely disrupted by the pandemic, as was the whole UK auto retail sector. Despite a strong Q120 and continued outperformance of the new car market, management had anticipated an H120 underlying loss before tax, which was duly recorded at £8.9m. FY20 management guidance for a near break-even performance is encouraging as recovery is already apparent in increased June and July activity levels. With a strong half-year cash position, MMH is positioned to pursue its growth strategy as the momentum of recovery builds into FY21.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

2,186.9

24.7

26.3

8.54

4.6

7.1

12/19

2,276.1

22.1

22.9

2.85

5.2

2.4

12/20e

2,022.8

(0.3)

(0.4)

0.00

N/A

N/A

12/21e

2,240.3

13.9

13.9

6.00

8.6

5.0

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

COVID impacts negotiated

The 10-week shutdown of its retail operations led to an underlying £8.9m loss before tax that would have been worse but for support from government and brand partners alongside its own mitigating measures. As a result, end-H120 adjusted net cash (excluding leases) of £27.4m was strong, providing a base from which to navigate the market recovery. With the FY19 final dividend cancelled, no interim was paid. July was a much better trading month for the UK new car market, with sales up 11% year-on-year as pent-up demand was released in both retail sales and aftersales. September remains an important month due to the plate change, but as furlough eases, we expect a decrease in the UK workforce, which may pressurise demand from Q420. Management expects close to break-even FY20 profit before tax, and the cash benefits should partially unwind by the year end.

FY21 visibility remains poor

The outlook for FY21 remains extremely uncertain and MMH remains cautious as to the possible levels of demand, with the potential rise in UK unemployment a key concern. While a vaccine may facilitate recovery, there is no guarantee one can be found or when it may start to ease economic constraints. In the meantime, localised lockdowns may disrupt specific franchises. Our base case FY21 estimate reflects the SMMT’s July forecast for a 27% recovery in 2021 new car registrations (vs FY20) and we assume MMH slightly outperforms that. We expect used volumes to follow a similar path and with a more robust aftersales recovery. With potential supply issues and Brexit, we feel risk to our estimate is to the downside.

Valuation: Multiple expansion anticipates recovery

Management has not guided for FY21 but on our current estimate MMH trades on an FY21 P/E rating of 8.6x, which is not extreme as multiple expansion is expected as the market recovers. A subsequent contraction to usual ratings depends on the shape and rate of recovery, which at this stage remains very uncertain.

H120 reflects mitigation of lockdown disruption

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.

Exhibit 1: MMH H120 key financials

(£m)

H119

H120

H117

Revenues

1,183.3

895.3

(24.3%)

EBITDA

30.0

7.5

(75.0%)

EBIT (underlying)

20.2

(3.6)

Profit before tax (underlying)

15.2

(8.9)

EPS (p) - ongoing underlying

15.0

(11.2)

DPS (p)

2.85

0.00

(100.0%)

Adjusted net cash

5.8

27.4

NAV per share (p)

257

244

(100.0%)

Source: Company reports

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.

Exhibit 2: MMH gross margin analysis

Year to Dec

2019

2020e

Year-on-year change

(£m)

H119

H219

FY19

H120

H220e

FY20e

H120

H220e

FY20e

Revenues

New Car

569.1

510.4

1,079.5

417.4

524.2

941.6

(27%)

3%

(13%)

Used Car

509.6

477.1

986.7

395.6

494.1

889.7

(22%)

4%

(10%)

Aftersales

129.5

128.6

258.1

100.3

134.6

234.9

(23%)

5%

(9%)

Intra group

(25.0)

(23.2)

(48.2)

(17.9)

(25.4)

(43.3)

(28%)

10%

(10%)

Total group revenue

1,183.3

1,092.9

2,276.1

895.3

1,127.5

2,022.8

(24%)

3%

(11%)

Gross profit

New

43.6

36.6

80.1

25.2

36.7

61.9

7%

6%

6%

Used

33.5

32.0

65.5

24.3

31.6

55.9

(43%)

(39%)

(41%)

Aftersales

57.8

56.8

114.6

45.2

60.6

105.7

69%

87%

78%

Internal/Other

0.2

0.4

0.6

0.5

0.0

0.5

44%

198%

127%

Group gross profit

135.0

125.8

260.8

95.2

128.9

224.1

1%

7%

4%

Gross profit margin

 

New

7.7%

7.2%

7.4%

6.0%

7.0%

6.6%

Aftersales

6.6%

6.7%

6.6%

6.1%

6.4%

23.8%

Used

44.6%

44.2%

44.4%

45.0%

45.0%

11.9%

Group

11.4%

11.5%

11.5%

10.6%

11.4%

11.1%

Source: Company reports, Edison Investment Research estimates

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.

Outlook

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.

Exhibit 3: Marshall Motor Holdings earnings estimates

Year to December (£m)

2019

2020e

2021e

New Car

1,079.5

941.6

1,035.8

Used Car

986.7

889.7

978.7

Aftersales

258.1

234.9

270.1

Intra group

-48.2

-43.3

-44.2

Group revenues

2,276.1

2,022.8

2,240.3

 

 

 

EBITDA

52.0

34.0

45.1

Underlying EBITA

32.0

12.0

24.9

Underlying PBT

22.1

(0.3)

13.9

 

 

 

EPS - underlying (p)

22.9

(0.4)

13.9

DPS (p)

2.9

0.0

6.0

Adjusted net debt/(cash)

30.6

17.4

5.2

Source: Company reports Edison Investment Research

Exhibit 4: Financial summary

£m

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,186.9

2,276.1

2,022.8

2,240.3

Cost of Sales

(1,933.6)

(2,015.3)

(1,798.7)

(1,993.9)

Gross Profit

253.2

260.8

224.1

246.4

EBITDA

 

 

52.3

52.0

34.0

45.1

Operating Profit (before amort. and except).

 

 

34.3

32.0

12.0

24.9

Intangible Amortisation

(0.3)

(0.4)

(0.4)

(0.4)

Exceptionals

(6.7)

(2.4)

(1.8)

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

27.3

29.2

9.8

24.4

Net Interest

(9.6)

(9.9)

(12.3)

(11.0)

Profit Before Tax (norm)

 

 

24.7

22.1

(0.3)

13.9

Profit Before Tax (FRS 3)

 

 

17.7

19.2

(2.5)

13.5

Tax

(4.7)

(4.1)

(0.2)

(3.0)

Profit After Tax (norm)

20.5

17.9

(0.3)

10.9

Profit After Tax (FRS 3)

13.1

15.2

(2.7)

10.5

Average Number of Shares Outstanding (m)

77.7

78.2

78.2

78.2

EPS - normalised (p)

 

 

26.3

22.9

(0.4)

13.9

EPS

 

 

25.5

22.2

(0.4)

13.5

EPS - (IFRS) (p)

 

 

16.8

19.4

(3.5)

13.4

Dividend per share (p)

8.54

2.85

0.00

6.00

Gross Margin (%)

11.6

11.5

11.1

11.0

EBITDA Margin (%)

2.4

2.3

1.7

2.0

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

1.6

1.4

0.6

1.1

BALANCE SHEET

Fixed Assets

 

 

262.9

390.2

387.7

392.6

Intangible Assets

112.2

119.3

119.3

119.3

Tangible Assets

150.7

162.9

162.4

167.4

Right of use asset

108.0

106.0

106.0

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

466.3

560.5

551.8

564.4

Stocks

384.0

470.7

455.1

470.5

Debtors

71.9

79.2

87.0

78.4

Cash

1.2

0.1

0.1

5.1

Other

9.2

10.6

9.5

10.4

Current Liabilities

 

 

(502.2)

(608.4)

(589.1)

(607.6)

Creditors

(501.5)

(582.8)

(589.1)

(607.6)

Short term borrowings

(0.6)

(25.6)

0.0

0.0

Long Term Liabilities

 

 

(30.8)

(139.9)

(150.4)

(143.2)

Long term borrowings

(5.7)

(5.0)

(17.5)

(10.3)

Lease Liabilities

0.0

(108.1)

(106.1)

(106.1)

Other long-term liabilities

(25.2)

(26.8)

(26.8)

(26.8)

Net Assets

 

 

196.3

202.3

200.0

206.2

CASH FLOW

Operating Cash Flow

 

 

39.2

43.6

34.0

43.9

Net Interest

(2.1)

(1.0)

(1.0)

(2.1)

Tax

(4.7)

(4.1)

(0.2)

(3.0)

Capex

(23.4)

(19.5)

(10.6)

(16.1)

Acquisitions/disposals

1.6

(27.4)

0.0

0.0

Financing

(1.0)

(0.9)

0.0

0.0

Dividends

(5.0)

(7.2)

0.0

(1.6)

Other

(7.6)

(9.0)

(9.0)

(9.0)

Net Cash Flow

(2.9)

(25.4)

13.2

12.1

Opening adjusted net debt/(cash)

 

 

2.2

5.1

30.6

17.4

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing adjusted net debt/(cash)

 

 

5.1

30.6

17.4

5.2

Net financial liabilities (including lease liabilities)

138.6

123.5

111.3

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.

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General disclaimer and copyright

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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

1,185 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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