Thursday, 24 February 2011

Vroom Vroom Vertu...

Vertu Motors plc (VTU) claims to be the eighth largest motor retailer in the UK. The words 'retail', 'motor' and 'investment opportunity' do not always sit easily in the same sentence, so let's see if VTU has enough oomph to get into top gear or whether I've got a lemon on my hands.

Why Am I Interested?

1. The shares are trading at a 37% discount to reported net assets
2. Directors have been buying in the last 12 months
3. Declared a maiden dividend in its interim results in October 2010
4. I have a holding at a break-even cost of 31p per share (acquired before my blog started)


History & Operations

VTU was formed in 2006 as a new vehicle to consolidate UK motor retailers, raising £25m and listing on AIM in December 2006. Since then, the Company has made numerous acquisitions and raised £56m through two Placings and has £45m in debt facilities (£12m drawn).

In essence, the strategy involves buying dealerships at reasonable prices and getting more out of them through applying "consistent business processes and systems" - ie increasing profits through harmonising and standardising as part of a larger corporate organisation - the whole is worth more than the sum of the parts kind of thing.   

The Company is now present in over 70 locations, via 84 franchised and 3 non-franchised sales operations.

Activities include: new and used car sales, fleet contracts, commercial vehicles and 'after-sales' (servicing, repairs and parts). After-sales has by far the highest gross profit margins (41%) compared to new car sales (8%) and used car sales (10-12%).

The main brands sold include: Ford, Honda, Vauxhall, SEAT and Peugeot.

Investor Relations can be found here 

Share Price & Value

The current share price of 28.5p (mid-point as at 23 February) gives the Company a market value of £57m. Based upon the 2010 basic EPS of 2.2p, this represents a PER of 12.8x. The Company is listed on AIM

In the past five years, the shares have hit a high of 101.5p (Dec 2008) and a low of 10p (Feb 2007).

Source: London Stock Exchange
Risks & Challenges

- execution risk in a buy and build strategy - need to buy the right things at the right price;

- the motor "trade" is littered with the dead bodies of snake-oil salesmen. Anecdotally, the industry seems to have cleaned itself up a bit in the past decade, and maybe the consumer responds more favourably to a quality, corporate offering. One thing for sure, a profit is only a profit once it turns to cash;  

- the sale of new (and used) cars is tied to some degree to economic well-being. The industry received some support via the government scrappage scheme, which ran from May 09 and was equivalent to the US's Cash for Clunkers scheme, but it remains a challenge. On the plus side, new car sales do not generate a huge amount of gross profit for the dealers, unlike servicing and maintenance, although you cannot have one without the other; and

Fancy a new motor?
- the Vertu business model is evolving and we do not have the benefit of a 10 year pedigree to analyse.

The Rules

The following analysis is based on the 12 months to 28 February 2010 (FY10) unless otherwise stated

1 - Assets - the NAV at February 10 was £90m compared to a market cap of £57m, equating to a discount of 37%. Better still, there was net cash of £23m, which if valued at par, means that you can buy £67m of assets for £34m - a discount of 50%.

Even if Goodwill of £21m and Cash are excluded, you can buy £46m of assets for £34m, which still represents a discount of 26%. The bulk of these assets are in relation to freehold and long leasehold sites. Pass

2 - Market Value - a market cap of £57m. Pass

3 - Cash Flow - (a) net current assets of £18m and (b) operating cash of £15m after working capital movements. Out of this, we need to cover replacement capex (£3m - est), interest (£1m) and tax (£1m - FY10 P&L), meaning that there is £10m "left over". Cash generation was also good in FY09 and it gives some comfort to see profits turn to cash. Pass

4 - Debt - (a) net cash of £23.5m and (b) Adjusted EV/EBITDA of 10x, which is a full valuation and probably reflects the asset nature of the business. This assumes that EBITDA is adjusted by £3m for replacement capex, which may be harsh for a growing business

Also, a word of caution in the FD's review re the cash balances:

The positive net cash balance at 28 February 2010 reflects the seasonal reduction in working capital, typical of the industry, which arises at the period end prior to a plate change month. Consequently, the year end net cash balance is higher than the normalised cash balances throughout the remainder of the year.

Unfortunately, he does not say what the normalised position would be.

5 - PER - based upon FY10 EPS of 2.23p, the current PER is 12.8x. The Company has only been listed for three financial years and has been growing through acquisition each year. The three year average EPS is 1.1p, but I do not consider this to be a representative level of earnings. Pass(ish)

6 - Yield - no dividend was declared in FY10. However, they intend to embrace a modest, but progressive, dividend commencing with the FY11 interims (see below). Fail, but potential to Pass  

7 - ROE - was 7% in FY10. Given that the Company has been acquisitive in the past couple of years, there will be a time lag in seeing profits come through at the appropriate levels. Whilst the current level of profitability is not as high as we would like, it is important to remember that it does not represent the finished product. As work in progress, it gets a Marginal Pass

8 - Directors - the two executive directors held 8.2m (£2.3m) of shares between them at  February 2010. The directors had reasonable basic salaries, but generous bonus arrangements, linked to PBT targets, which will be good for shareholders if set at the right levels. Pass.

9/10 - Buy or Bye? - N/A given the relatively short-trading history.


The interim results for the 6 months to August 2010 were released in October and were pretty bullish. EBITDA and operating cash came in at c£7m, NAV of 46.8p (of which tangible assets were 38.3p), net cash of £15m and a maiden dividend of 0.2p against EPS of 1.8p. After-sales contributed 43% of Gross Profit and helped to offset the slight fall in used car margins. Volumes in September 2010, outside of these results but the second most important month of trading, was ahead of expectations.

Five directors acquired 337k shares at 29.25p in October 2010. F&C and BlackRock also topped up their holdings to over 10% each on October 2010.


Vertu is not a Net Net, probably does not have a moat and is arguably not one for orphans and widows. However, I like it. There is a discount to net assets, cost control and cash generation, I can see the merits in the business plan (if executed properly), a growing dividend and insider buying. Whilst there will be short-term challenges ahead, I am content to sit and wait to see what the full-year results will bring in May 2011.

I am going to HOLD with a price target of 50p, getting us a lot closer to NAV and also equating to notional EPS of 5p on a PER of 10x.

Tuesday, 22 February 2011

Drax Delivers!

Drax Group plc (DRX) announced its full year results (12 months to December 2010 - FY10) today and appears to have picked up where my analysis of 14 January 2011 left off.

At the headline level, turnover and every measure of profit were up on FY09, resulting in a total dividend for the year of 32p and putting DRX on a yield of c8% based on a current market price of 403p.

Whilst gross margin was down slightly and there are some headwinds which will lead to lower profits in FY11 (if market expectations turn out to be correct), this appears to be a strong operational performance. 

There is still some uncertainty concerning the further development on biomass, with the Company unwilling to scale up further in this area due to "insufficient regulatory support".

Updated Rules

1/2 - Assets - NAV actually fell in the period from £1.025bn to £958m despite the increase in profits. This appears to be due in part to a £232m "loss" booked when forward contracts are marked-to-market through the hedge reserve. The market value is therefore at a 50% premium to net assets, but my previous comments on the matter still apply.

3 - Cash Flow - (a) net current assets of £92m and (b) operating cash of £466m after working cap and interest, to be used to cover replacement capex (£50m - estimate), tax (£67m - 2010 P&L), debt repayment in next 12 months (£68m) and FY10 dividend (£116m). This leaves £150-170m cash left over. There appears to be enough cash sloshing around to keep everyone happy.

4 - Debt - (a) the net cash position was £101m and (b) Adjusted EV/EBITDA of around 3x, which is very, very reasonable indeed.

5 - PER - is a very modest 7.8x based on FY10 EPS (basic diluted) of 52p

6 - Yield - FY10 DPS of 32p, represents a yield of 8%. This will be under pressure in FY11, but the Company is committed to paying out 50% of underlying earnings in dividends.

7 - ROE - FY10 ROE was 18%, which is more than satisfactory. 


I consider these to be a strong set of results, particularly with the good cash generation and net cash balances overall. I still maintain that a long-term price target should be around 576p (at least) and I'm seriously tempted to top up at 400p or below. The shares are marked ex-dividend on 27 April if you want to catch that 17.9p final dividend.

More of the Same at Gleeson

Grove Village, Manchester
MJ Gleeson (GLE) released its interim results for the six months to 31 December 2010 today.

I reviewed MJ Gleeson on 26 January 2011 and, whilst being underwhelmed in general with what I found, saw some potential upside on the appointment of a new CEO and how they were going to spend their surplus cash (dividend and/or strategic acquisition).

I am not going to dissect the interim results to the same degree, as I am more interested in annual results spanning over a decade, but will give some high level thoughts.

6 Months to December 2010

NB all comparatives are to 6 Months to December 2009 unless otherwise stated

Revenue was down 24% primarily due to there being only one land sale rather than two, although house sales did increase 73%, albeit from a very low base. A second land sale has been agreed but not completed, so that will help FY11 results. Negative comment about the lack of supply in mortgages implies that the glory days of house-builders are far over the hills.

Overheads were slightly reduced, benefitting from the release of a prior provision.

A huge Profit After Tax of £0.1m was recorded, but at least it was in the black.

Cash generation was good, with cash balances increasing by £0.5m to £19m. Net Asset Value was £98m or 186p per share. No interim dividend was declared.


The shares reached the dizzy heights of 140p in the last few weeks, perhaps fuelled by speculation that there might be a special dividend or some other favourable news.

At the time of writing, the shares have fallen back to 126p, giving the company a market value of £73m.

Assuming that the cash balances are valued at par (about 19p per share), this means that the rest of the business (strategic land and houses to be sold) are still valued at a 35% discount to book cost.


No update on the CEO and no update on how and when they intend to spend that cash.

It is difficult to see any positive stimulus on the share price without any news. At least they are chugging away with what they've got, covering the overhead and maintaning the cash balance.

GLE will remain in my portfolio for the time being, but if I see an opportunity that is more favourable, I shall not be too sentimental about removing it. 

Sunday, 13 February 2011

Jacques Vert: Green for Go?

After the roller-coaster that is HMV (mostly a roller-coaster in the downward direction), I am more suspicious of retail stocks. Jacques Vert Plc (JQV) might just restore the faith and put the fun back into the fairground.

JQV is a retailer of four womenswear brands, aimed at the middle-aged to older lady (aged 30+), sold through its own stores, department stores and the internet.

The current share price of 16.75p (mid-point as at 11 February) gives the company a market value of £32m. Based upon the 2010 basic EPS of 2.5p, this represents a PER of 6.7x. The Company is listed on AIM.

Source: London Stock Exchange
In the past five years, the shares have hit a high of 26.5p (April 2007) and a low of 3.25p (Dec 2008).


The Company was founded in 1972 by two tailors and listed on the stock market in 1977 with the Jacques Vert brand. 

In December 2002, the Company acquired William Baird Plc, which came with three further brands and a garment manufacturer in Sri Lanka for £18m.

In late 2010, the Company started to develop its online presence with the launch of two multi-brand sites.

The four brands are now retailed in c900 outlets, including a small presence in Canada and Ireland.

Risks & Challenges

  • Fashion-led retail, although geared towards older women, which as a group tends to have more disposable income and favourable demographics;
  • Currency risk / overseas suppliers - there appears to be a hedging strategy in place, but currency movements will have an impact;
  • There is small pension scheme deficit on the balance sheet (£0.65m) and
  • An upgrade to the IT infrastucture to support online growth has been announced - budgeted at £3m - but brings with it the risks of not being implemented to time or cost.
The Company website is here 

The Rules

The following analysis is based on the 12 months to 24 April 2010 (FY10) unless otherwise stated

1 - Assets - the NAV at the April 10 was £23m compared to a market cap of £32m, equating to a premium of 39%. On the face of it, the balance sheet looks healthy with limited goodwill, lots of cash (£12m) and positive net current assets.  

However, when you probe the notes it gets potentially better as you discover that there are £11m of unrecognised deferred tax assets (ie will help to reduce the tax bill when profits are made). Adding in the deferred tax asset and deducting £4.5m out of the cash for the 2010 dividend and a planned IT upgrade, results in an adjusted NAV of £30m or 15.5p per share.

In addition, there is potential upside in the market value of the fixed assets (£3m book value versus cost of £18m) and future costs being lower than provided for (£6m) in respect of dilapidations and claims against the group in respect of industrial diseases (but these will be utilised over the next 20 years).

On this basis, I conclude that the market value is trading at around adjusted asset value, of which around £8m (25%) represents cash. Pass

2 - Market Value - a market cap of £32m is lower than the floor of £50m, but I'm considering dropping this to £20m anyway. Pass(ish)

3 - Cash Flow - (a) net current assets of £23m and (b) operating cash of £9m after working capital and provision movements. Out of this, we need to provide for capex (£1m) and tax and dividends (£1.5m), meaning that there is plenty of cash left over. Pass

4 - Debt - net cash of £12m, resulting in an EV of £20m. With EBITDA of £7m, this results in an EV/EBITDA ratio of 2.9x. Even with adjusted cash of £8m (see #1 above), this still represents an EV/EBITDA ratio of just 3.4x.

Given that it is a retailer, we can have a look at the rent positions. Annual rents of £4.7m, result in EBITDAR of £11.7m. If rents are capitalised at 8x, we have a rent-adjusted EV of £58m. The rent-adjusted EV/EBITDAR ratio is 4.9x, which is acceptable. Pass

5 - PER - the 2010 EPS was 2.5p, implying a PER of 6.7x based on the current price.

The acquisition of Baird in December 2002 transformed the existing Vert business and consequently, I am going to consider FY04 (12 months to April 2004) as my starting point for analysing long-term results to ensure an element of consistency.  Also, the current CEO and FD assumed their roles in 2003, so there is a nice overlap with this period. Based on this 7 year analysis, the average EPS falls to 1.6p, equating to a PER of 10x, which is still below the target ceiling of 12x. Pass

6 - Yield - the 2010 DPS was 0.65p, representing a yield of 3.9% and earnings cover of 4.2 times . The dividend is new territory for the company (no dividend has been paid in the past ten years (source: Sharelockholmes)) and lots of warm noises are being made: "The Board believes it is in the interests of the Company and the shareholders to put a progressive dividend policy in place". Pass

7 - ROE - the 2010 ROE was 25% and the average annual 7 year ROE is 21% (source: Sharelockholmes). Pass

8 - Directors - the directors are interested in about 9m shares and (discounted) options (c£1.5m in value). Remuneration is reasonable, although the Execs did get 100% bonuses in FY10, which seems generous. The two Execs and the Chairman acquired 0.5m shares at 15p each in July 2010, which is encouraging. Pass

9/10 - Buy or Bye? Based upon a 7 year average of EPS of 1.6p and a 7 year average PER of 8x, we arrive at a 'long-term fair price' of 13p, which is below the current price. Bye


The interim results for the 6 months to October 2010 were released in January 2011, including a trading update. The results were broadly positive, and despite the tough trading conditions, posted LFL sales +3.1%, although margins were squeezed slightly (-0.3%). Positive cash generation was maintained. Sales were effected in the miserable December weather, but rebounded in January, which is more than most listed retailers have said.

Investors Chronicle tipped it as a BUY in January 2011.


So, Jacques Vert is a small-time AIM listed fashion-led retailer, which should be enough to make me run for the hills. However, it passes all of my Rules, apart from the long-term fair price one, which is miserable. It is not a 'Net Net' nor is it valued at a significant discount to reported net assets, but it appears to be a well run business, valued on a lowly multiple with lots of cash swilling about, and upside potential in its balance sheet (market value of assets), business model (defensive customer base and expanding online presence) and dividend policy (now that it has one).

I am going to BUY the shares at around 17p (note the nasty spread) and aim for a target price of at least 30p, being basic EPS of 3p and a rating of 10x (above the current 7x, but below the retail sector average of 13x). The cash balance and dividends will give me some down-side protection whilst I wait. Green for Go. Hopefully.