Vertu Motors

Ticker
$VTU:LN
Buy Price
$0.41
Holding Type
General
Investment Theme
Open/Closed
Trade Date
January 6, 2017

Purchased this stock at 41p per share. Vertu is a UK-based auto retailer (car dealership). They have a good mix of new and used sales with a growing service/repair division (generates significantly higher gross profits). Here is the business mix for 6 months of 2016:

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There are 400m shares outstanding for a $164m market cap (in GBP). Vertu has $32m in cash and $19m in debt for a $151m EV. Last year EBITDA was $35m (4.3x multiple) and earnings were $21m (7x multiple). This is a low-margin business (~1.5% EBITDA margins / 0.9-1.0% net margins) but EV/sales is 0.05x which generally indicates bankruptcy, not a profitable company with net cash. Management is busy rolling up smaller UK auto dealers and has done $88m in acquisitions over the last 2.5 years. The big negative is the investment required to update old dealerships and improve IT. Operating cash flow is good ($57m in 2016), but management anticipates increased capex in 2017-2018 ($28-31m) and then dropping off in 2019 ($15.5m). Because of these capital investments and the acquisition program, the company has used equity to fund these needs. The share count has doubled from 200m in 2010 to 400m today. The market is worried that Brexit and peak auto sales will hurt the company. My view is that the roll-up strategy, clean balance sheet, and profitability will win out. At 10x earnings, this would be a 60p+ stock for nearly 50% upside. Maybe more upside to come if they can get back to historic multiples of 11.5x earnings/0.08x sales/5.8x EBITDA.