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.
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.
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.
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.