Marshall Motor Holding — Strong H1 in a softening market

Another record trading period was boosted by the full period contribution from Ridgeway. MMH made strong progress in H117 as group sales rose 43.7% to £1.19bn (H116 £0.83bn). Adjusting for the acquisition, sales rose by 6.7% on a like-for-like basis, an encouragingly strong performance against a new car market that was down 1.3%. In part the outperformance is driven by the increasing premium brand franchise mix, which now represent 62% of MMH’s portfolio and which continue to deliver strong performances. Underlying profit before tax and EPS both rose by 32.9%. The majority of the improvement can be attributed to the full consolidation of Ridgeway as it increased its contribution to underlying profit before tax by £4.4m to £5.4m.

As shown in Exhibit 2, group gross margins fell from 11.9% in H116 to 11.6% in H117 largely reflecting the impact of investment in used car sales in the Retail segment. Leasing fell in line with management expectations, which however represented a sequential improvement compared to H216. Gross margins rose in both the new car and aftersales activities.

Operating costs represented 9.7% of revenues compared to just over 10% in both halves of FY16. This has been achieved despite several cost headwinds such as increased credit card fees, the living wage and other factors. Employee costs remained stable compared to H216, with a rise in other costs being the main driver of the overall sequential increase of £7.5m compared to H216.

In the Retail segment overall new car sales rose by 27.6% to 27,928 units in the period (H116 21,884 units), a like-for-like decline of 3.8% reflecting the policy to withdraw from lower margin fleet sales. These fell by 8.7% on a like-for-like basis, although 11,026 units represented a 20.6% increase when including Ridgeway sales. The like-for-like decline in retail sales of 0.4% compared to a H117 UK retail car sales decline of 4.8% and overall unit sales rose by 32.7% to 16,902 cars.

Overall new car revenues (51.3% of Retail segment sales) increased by 41.8%, reflecting the improved mix brought by the addition of Ridgeway with gross margins improving by 23bp to 7.4% generating gross profits that were 46.3% higher at £45.1m. This was just over one-third of the retail segment’s gross profit.

Used car revenues (38.4% of Retail) rose by 49.3% on unit sales that rose 43.1% to 23,716 (H116 16,976 units) or by 5.8% on a like for like basis. Used car gross profit rose by 36.9% to £31.2m, with a gross margin of 6.8%, down 63bp on the prior year. The reduction was largely due to efforts to increase stock turnover and drive volume. MMH has a much larger used stock pool following the 2015 and 2016 acquisitions and continues to develop its offering in the segment, especially through an increased online presence with the acquisition of a new web domain (www.marshall.co.uk) and the launch of a used car app.

PCP popularity remained high, accounting for 83% of financed new car sales for MMH. In the used car segment, PCPs financed 62% of financed purchases, up from 55% in H116. The increased overall penetration of PCPs provides a ready flow of three- to four-year-old good-quality used cars, as well as providing improved visibility and connection with customers and facilitating aftersales in conjunction with service plans. We continue to regard the concerns over the use of PCPs as a finance method as being of more concern in the lower end of the market, which is not where major retailers such as MMH operate. Creditworthiness is already a major check against customers.

Aftersales services, including bodyshop, continued to show good growth consistent with the growing UK car parc (vehicles in use). Revenues of £123.3m were up 43.1% on H116 (£86.2m) or 2.3% like-for-like. Aftersales accounts for just 10.5% of Retail turnover, but with gross margins rising to 46.5% (H116 46.1%), gross profit of £57.3m represents 42.9% of the segment total. Vehicle service performance was particularly strong during the period.

In the smaller Leasing segment EBIT fell 11.0% to £2.6m, despite 1.5% year to date growth in the fleet to 6,290 vehicles (up 3.5% over the 12 months). Lower disposal profits per unit and a very strong comparable period performance were the main reasons for the earnings decline. The net book value stood at £72.2m at the period end financed largely through back-to-back loans of £65.9m. The fleet is expected to continue to grow, with a strong order book at the half year.

The labour market fundamentals and the low interest environment remain supportive of a buoyant new car market. However, consumer and business confidence has had to contend not just with concerns over Brexit but also with the uncertainty that has been created by the general election. Add to this the distortion of the VED changes, negative press with respect to PCP finance and the policy shifts away from diesel, and it is unsurprising that a good deal of uncertainty remains over the direction of the market. The strong Q1 performance has now been outweighed by four straight months of decline.

The SMMT new car registration forecast for 2017 has been revised down once again having been raised from the initial 5% decline to a 2.2% fall in May. The forecast, which is derived from the average consensus of a panel of forecasters, is now for a decline of 3.7% to 2.594m units from 2.693m in 2016. A further 3.4% decline is anticipated in 2017. New light commercial vehicle (LCV = vans) sales are expected to fall by 2.0% to 0.368m vehicles this year and 1.0% in 2018. Both car and van sales remain at very high levels in historical terms. Diesel cars’ share of the new car market continues to fall sharply to 43.2% expected this year, down from 47.7% in 2016 and a peak of 50.8% in 2012.

The implication is that the new car market will see a sharper fall in new car sales of 6.3% in H217, compared to the 1.3% decline in H1. The used car market remained buoyant through Q1 with a 3.4% rise in transactions to 2.1m units. However, the overall picture remains muddied and any improvement in confidence levels could stimulate an improvement in demand. Aftersales activity is expected to continue to grow in line with the larger car parc in the UK, supported by an increased number of cars financed on PCPs that require service histories to be maintained.

Like its peers. MMH’s most profitable activities in the Retail segment are used car sales and aftersales services. It remains to be seen how the market background translates from the softer new car market but H117 has been encouraging in terms of MMH’s outperformance of the market, which we expect to continue in H217. We have a more cautious expectation for the group in like-for-like terms. We expect leasing to remain relatively stable at H117 levels and thus feel our existing overall group earnings estimates are achievable.

The only change is that we have increased our dividend forecast following the larger than expected increase in the interim payment. Assuming management maintains its 1:2 split with the final, we now forecast 6.45p for the current year compared to 6.00p previously. This would be covered 4.4x by FY17e EPS, within management’s guided range of 4-5x cover. Of course this does have a modestly detrimental impact on net debt both this year and next.