Marshall Motor Holdings — Growing share in tough markets

Marshall Motor Holdings (LN: MMH)

Last close As at 04/11/2024

394.00

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Market capitalisation

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Research: Industrials

Marshall Motor Holdings — Growing share in tough markets

Although the UK election result may provide greater certainty for car buyers, the most recent forecasts from industry bodies continue to anticipate weaker demand in 2020. While Marshall Motor Holdings (MMH) is delivering on its profit expectations for 2019, the combination of the potential further weakness in car markets and the investment being made in loss-making businesses to grow future share and profits leads us to reduce our FY20 PBT estimate by £4.1m. However, a FY20 P/E ratio of 7.7x remains undemanding and is supported by the healthy dividend yield.

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Industrials

Marshall Motor Holdings

Growing share in tough markets

Closing update and acquisitions

Automotive retail

19 December 2019

Price

150p

Market cap

£117m

Adjusted net cash (£m) at 30 June 2019

5.8

Shares in issue

78.2m

Free float

35%

Code

MMH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.0

2.4

(3.2)

Rel (local)

2.2

(1.6)

(15.3)

52-week high/low

176p

135p

Business description

Marshall Motor Holdings is the seventh largest UK motor retailer, operating 119 franchises spread across 24 brands at 96 locations. 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

FY19 results

10 March 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

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

Although the UK election result may provide greater certainty for car buyers, the most recent forecasts from industry bodies continue to anticipate weaker demand in 2020. While Marshall Motor Holdings (MMH) is delivering on its profit expectations for 2019, the combination of the potential further weakness in car markets and the investment being made in loss-making businesses to grow future share and profits leads us to reduce our FY20 PBT estimate by £4.1m. However, a FY20 P/E ratio of 7.7x remains undemanding and is supported by the healthy dividend yield.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17**

2,232.0

25.4

26.9

6.40

5.6

4.3

12/18

2,186.9

25.7

27.4

8.54

5.5

5.7

12/19e

2,201.9

23.2

23.0

8.54

6.5

5.7

12/20e

2,359.8

19.7

19.5

8.54

7.7

5.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **Restated following the sale of Leasing in FY17. IFRS 16 adopted from FY19; prior years not restated.

Investing during market weakness

MMH is continuing its policy of adding dealerships as regional and brand in-fills to optimise its coverage due to its strong balance sheet. MMH then applies its own operational tools, including the Phoenix 2 management information system, to improve returns from the underperforming sites being acquired. The latest are seven Volkswagen (VW) sites (including one commercial vehicle franchise) and a Skoda site being acquired from Jardine Motors Group for up to £22.3m including £13.0m of inventory, adding to two Honda sites acquired from the same vendor in October. In the year to date, MMH has invested in 20 new business units that we estimate generate around £350m of sales with historic losses of c £4m. Returning these to profitability is clearly the priority, but with challenging markets it is likely to be FY22 before the benefits of these deals start to emerge.

Trading conditions not easing yet

We estimate the new dealerships are likely to make a pre-tax loss of c £2.5m in FY20. We also assume weaker UK car market conditions persist for longer into 2020, with a consequent fall in demand for both MMH’s new and used car sales, although we expect outperformance relative to the overall market decline. In aggregate, while increasing our FY20 revenue estimate by almost 5%, we reduce our PBT and EPS estimates by 17% to reflect these factors. The recent election means the UK government should be able to assert greater control over the economy, which we feel could lead to improved buyer confidence next year.

Valuation: Dilution should progressively dissipate

Although market conditions remain challenging, we feel investing in future potential for growth during a weaker phase of the market should ultimately prove astute. The rating remains undemanding and the more than twice-covered dividend yield provides support for investors awaiting an uptick in car markets.

Strategic acquisition of eight VW Group franchises

For a cash consideration of up to £22.3m including £9.3m of inventory, MMH is buying six VW passenger car franchises in Aylesbury, Harlow, Letchworth, Loughton, Milton Keynes and St Albans, as well as a VW commercial vehicle franchise and bodyshop in Loughton and a Skoda passenger car franchise in Milton Keynes. Geographically these all fit with MMH’s footprint being largely based in the home counties and all appear to be well invested. In 2018 the businesses being acquired had revenues of £212.8m (2017 £196.1m) and made a loss before tax of £2.8m (2017 £3.3m).

The Volkswagen franchise in Aylesbury shares a site with an Audi Approved Used business which is being retained by JMG. Completion of Aylesbury Volkswagen will be deferred pending completion of the legal process to sub-divide the site. It is expected that this process and the transfer of the Aylesbury Volkswagen business will be completed in 2020.

Following the deal, MMH will represent the Volkswagen Group UK in 53 operations across the UK, making MMH its largest partner by number of locations. The total of 14 VW passenger car retail centres will make MMH the second largest partner for the brand with the addition of Milton Keynes Skoda further consolidating MMH’s position as the leading retailer for Skoda UK. With seven commercial vehicle locations, MMH also strengthens its leading position by sites for the marque.

Other portfolio developments

In September 2019 MMH acquired two Honda dealerships from Jardine Motor Group in Reading and Newbury, strengthening its position as Honda’s second largest partner in the UK with eight sites. In October MMH opened a VW Commercial Vehicle centre in Lincoln on its previously vacated Jaguar Land Rover site, which transferred to new premises. The Honda and Lincoln franchises are expected to add around £30m to sales next year and be marginally dilutive, and be earnings enhancing from FY21.

The group has also commenced a new partnership with LEVC, a Geely Automotive subsidiary and the manufacturer of electric London taxis. MMH is the largest Volvo dealership group in the UK and will represent the LEVC brand in Nottingham. The group is also in advanced negotiations to acquire the Volvo franchise in Derby which is expected to complete before the year end, taking the total number of MMH Volvo dealerships to nine.

Earnings revisions

The acquisition is not expected to have any significant impact on current-year numbers although year end net debt is likely to be some £12m higher, reflecting the acquisition cash consideration. The EPS decline of 1.2% reflects a slight increase in the share count.

Overall, we have reduced our group FY20 PBT estimate by £4.1m, of which £2.5m reflects the losses of the businesses being acquired. Management expects the dealerships to remain dilutive in FY21 before starting to enhance earnings from FY22.

The remaining £1.6m reduction in our FY20 PBT estimate reflects anticipated weaker growth in the ongoing franchises, which has reduced our revenue expectation for those businesses by around £100m spread across new car sales, the used car activity and aftersales. It reflects the latest SMMT forecast for new car sales in 2020, which indicates a further 4.4% fall. While the recent election might improve economic confidence as the previous political impasse has been eliminated, this cannot be taken for granted.

Exhibit 1: Marshall Motor Holdings earnings estimate revisions

Year to December (£m)

2019e

2020e

 

Prior

New

Change

Prior

New

Change

New car

1,068.2

1,068.2

0.0%

1,102.8

1,145.8

3.9%

Used car

929.7

929.7

0.0%

948.3

989.5

4.3%

Aftersales

249.2

249.2

0.0%

252.3

270.6

7.2%

Intra group

(45.2)

(45.2)

0.0%

(46.1)

(46.1)

0.0%

Group revenues

2,201.9

2,201.9

0.0%

2,257.4

2,359.8

4.5%

EBITDA

51.3

51.3

0.0%

51.5

48.3

-6.2%

Retail

33.2

33.2

0.0%

33.5

29.9

-10.7%

Leasing

 

 

 

 

 

 

Unallocated

 

 

 

 

 

 

Underlying EBITA

33.2

33.2

0.0%

33.5

29.9

-10.7%

Underlying PBT

23.2

23.2

0.0%

23.8

19.7

-17.1%

EPS - underlying continuing (p)

23.3

23.0

-1.2%

23.8

19.5

-18.1%

DPS (p)

8.5

8.5

0.0%

8.5

8.5

0.0%

Adjusted net debt/(cash)

2.0

13.7

570.9%

(3.9)

9.4

n.m.

Source: Edison Investment Research estimates

Exhibit 2: Financial summary

£m

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,232.0

2,186.9

2,201.9

2,359.8

Cost of Sales

(1,973.7)

(1,931.2)

(1,944.5)

(2,083.9)

Gross Profit

258.3

255.7

257.4

275.9

EBITDA

 

 

42.0

41.4

51.3

48.3

Operating Profit (before amort. and except).

 

 

32.9

32.0

33.2

29.9

Intangible Amortisation

(0.2)

(0.4)

(0.3)

(0.3)

Exceptionals

(12.8)

(7.0)

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

19.8

24.7

32.9

29.6

Net Interest

(7.5)

(6.4)

(10.0)

(10.2)

Profit Before Tax (norm)

 

 

25.4

25.7

23.2

19.7

Profit Before Tax (FRS 3)

 

 

12.3

18.4

22.9

19.4

Tax

(3.1)

(4.8)

(5.2)

(4.4)

Profit After Tax (norm)

20.8

21.3

18.0

15.3

Profit After Tax (FRS 3)

9.2

13.6

17.7

15.0

Average Number of Shares Outstanding (m)

77.4

77.7

78.2

78.2

EPS - normalised (p)

 

 

26.9

27.4

23.0

19.5

EPS

 

 

26.1

26.5

22.3

18.9

EPS - (IFRS) (p)

 

 

11.9

17.5

22.6

19.2

Dividend per share (p)

6.40

8.54

8.54

8.54

Gross Margin (%)

11.6

11.7

11.7

11.7

EBITDA Margin (%)

1.9

1.9

2.3

2.0

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

1.5

1.5

1.5

1.3

BALANCE SHEET

Fixed Assets

 

 

266.6

270.6

365.0

363.3

Intangible Assets

121.6

112.2

119.2

119.2

Tangible Assets

145.0

158.3

172.8

180.1

Right of use asset

73.0

64.0

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

499.1

465.7

465.7

506.0

Stocks

401.3

384.0

381.5

408.9

Debtors

71.5

71.9

72.4

77.6

Cash

4.9

1.2

2.2

9.2

Other

21.4

8.6

9.6

10.3

Current Liabilities

 

 

(539.3)

(503.8)

(505.1)

(541.3)

Creditors

(538.6)

(503.1)

(505.1)

(541.3)

Short term borrowings

(0.6)

(0.6)

0.0

0.0

Long Term Liabilities

 

 

(35.2)

(32.0)

(120.0)

(113.7)

Long term borrowings

(6.5)

(5.7)

(15.9)

(18.6)

Lease Liabilities

0.0

0.0

(79.0)

(70.0)

Other long term liabilities

(28.7)

(26.4)

(25.1)

(25.1)

Net Assets

 

 

191.2

200.4

205.7

214.3

CASH FLOW

Operating Cash Flow

 

 

60.1

31.8

37.1

33.1

Net Interest

(2.9)

(2.1)

(1.0)

(1.0)

Tax

(3.1)

(4.8)

(5.2)

(4.4)

Capex

(57.5)

(23.7)

(19.5)

(16.7)

Acquisitions/disposals

44.6

1.6

(12.8)

0.0

Financing

0.0

(1.0)

0.0

0.0

Dividends

(4.5)

(5.0)

(7.2)

(6.7)

Other

80.2

0.3

0.0

0.0

Net Cash Flow

116.8

(2.9)

(8.6)

4.3

Opening adjusted net debt/(cash)

 

 

119.0

2.2

5.1

13.7

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)

 

 

2.2

5.1

13.7

9.4

Net financial liabilities (including lease liabilities)

92.7

79.4

Source: Company reports, Edison Investment Research estimates


General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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London +44 (0)20 3077 5700

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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

General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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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