If they haven’t done so already, value investors will soon look hard at Marshall Motors Holdings PLC (LON:MMH).
Marshall is one of the UK’s largest independent car retailers and has felt the backwash of a tough few months for motor dealers.
Rigorous new exhaust emissions tests have caught manufacturers out and left retailers short of vehicles, prompting new car sales to fall by 20% in September.
That has spilled over into profit warnings from several listed dealers.
Marshall has not been one of them, though chief executive Daksh Gupta was wary in his interim statement in September.
"The board believes it is right to remain cautious on the UK car market in light of continued economic uncertainty, ongoing consumer confusion around diesel vehicles and the residual impact of the new Worldwide Harmonised Light Vehicle Test Procedure [WLTP] changes on new vehicle supply," he said at the time.
WLTP has caused problems across the sector and throughout Europe, not just in the UK.
Germany has seen sales tumble 30% while France was down by 26%.
Weight the issue
In particular, the introduction of weight into the equation has substantially increased the number of tests on each model, causing shortages of some.
Gupta, believes while frustrating, WLTP will prove a one-off disruption and that the industry should return to normal trading patterns early in 2019.
He points out that sales in August rose 23% as manufacturers cleared vehicles tested under the previous regime.
“It was nothing to do with Brexit as has been claimed and was Europe-wide. It is purely a supply problem.”
Uncertainty over car tax is another issue arising out of WLTP.
Due to the tighter standards, emissions can go up and that can mean a higher road fund licence.
Demand from fleet buyers has been affected, with the corporate market also 20% lower in September according to trade statistics.
Some relief was hoped for in the Budget, but “The government will review the impact of WLTP on Vehicle Excise Duty (VED) and company car tax (CCT) to report in the spring.” was as much as the Chancellor said.
Franchised dealers strengthening their hold as cars get smarter
Gupta, though, has been selling cars for many years and going forward believes that fundamentals remain good and indeed are continuing to move in favour of franchised dealers such as Marshall.
New innovations such as in-car smart technology play into the hands of the franchises, he believes.
Latest ranges of hybrid and increasingly electric vehicles are filled with ‘connected car’ devices that constantly monitor performance, location and so on, with the information instantly sent data back to the manufacturer.
Gupta believes this will lead to dealers getting closer to customers and being able to retain them more readily when the initial warranty period expires, traditionally a time when people start to look elsewhere.
Brexit is another wildcard but Gupta says this is hard to asses before the final outcome is known.
Frictionless trading, as exists now under the EU, would be the best outcome, but even if ‘no-deal’ tariffs are imposed Gupta does not envisage a major impact on the business.
Most people buy cars now on personal contract purchase (PCP), which effectively means they are leased for three years with a residual value on the vehicle.
Marshall sold its leasing arm a year ago for £42.5mln, which cleared the debt from its balance sheet.
It earns commission now from cars sold through finance plans.
If car prices rise on a no deal-scenario, Marshall will earn more on a sale as the margin it makes on average selling prices. In addition, residual values will also pick up.
Consolidation has been a feature of the sector over the past decade.
Marshall itself is a big consolidator and has bought and sold 140 businesses during the past ten years.
The group now has 101 outlets covering brands that account for 82% of the car market.
Premium marques such as Mercedes, Jaguar Land Rover, Audi, and BMW are where Marshall is especially strong.
That activity has translated into a strong operating performance with sales doubling to £2.23bn since 2014 while underlying profits have risen by 141% to £37.2mln.
Net asset value is £2.58 in excess of the £120mln worth of property.
If required, there is also a credit facility of £120mln that gives enough firepower for ‘two sizeable acquisitions’, says Gupta.
Bang for your buck
That is a lot of bang for your buck at a share price of 126p, especially with a yield of 5.1% based on a maintained dividend.
Jitters over the sector, however, have seen the market value slip below £100mln in recent months.
On a long-term view, though, that looks too low given the record and fundamentals, especially as in six months time the economic picture might be a whole lot rosier.