Unified Dealership Integration And Digitalization Will Drive Efficiency

Key Takeaways

• Unified brand strategy, digitalization, and AI investments aim to reduce costs and enhance margins, bolstering future earnings.
  
• Partnerships with Chinese EV brands and optimized capital allocations offer potential growth in electric vehicle revenues and improved returns.
  
• The Zero Emission Vehicle Mandate and competitive pressures are squeezing new car margins, while rising interest costs and economic uncertainty threaten overall profitability.

Catalysts

Operates as an automotive retailer in the United Kingdom.

• The integration and implementation of a unified brand strategy, moving all dealerships under the Vertu brand (except Ferrari), is anticipated to deliver £5 million in medium-term savings, likely reducing operating costs and improving net margins.
  
• A significant focus on digitalization and AI is expected to drive efficiencies, including automated invoicing and used car pricing algorithms, potentially lowering operating costs and improving gross margins.
  
• The aftersales service department, being a high-margin business, continues to grow robustly with a £12.3 million increase in gross profit, which is expected to contribute to stronger future earnings.
  
• The expansion of partnerships with emerging Chinese EV brands like BYD, anticipated to capture significant market share, presents a potential growth avenue in revenues as the market shifts toward electric vehicles.
  
• The capital allocation strategy that includes evaluating and optimizing the dealership portfolio, paired with cost reduction programs, is likely to enhance return on investments, potentially improving net margins and earnings over time.

Vertu Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vertu Motors's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 0.5% in 3 years time.
• Analysts expect earnings to reach £26.1 million (and earnings per share of £0.08) by about May 2028, up from £18.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 11.2x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 1.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.5%, as per the Simply Wall St company report.

Vertu Motors Future Earnings Per Share Growth

Risks

• The significant disruption in the new car market due to the government's Zero Emission Vehicle Mandate has led to lower new retail vehicle volumes and a decline in profitability from the new car sales channel, impacting revenue and net margins.
  
• Rising interest costs, particularly from manufacturer stocking charges and interest on lease liabilities, have increased expenses, potentially impacting net earnings.
  
• The pressure on new car margins due to substantial discounting of battery electric vehicles (BEVs) to meet government targets could further erode profit margins if such market conditions persist.
  
• Increasing competition from Chinese entrants like BYD, potentially under pressure due to geopolitical risks and tariff changes, could lead to significant market shifts and margin pressure on traditional and European OEMs.
  
• Economic uncertainties and fluctuating interest rates affecting consumer confidence can impact both used and new car sales, influencing overall revenue and profitability.

Valuation

• The analysts have a consensus price target of £0.8 for Vertu Motors based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £5.3 billion, earnings will come to £26.1 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of £0.63, the analyst price target of £0.8 is 21.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.