Following the release of sharply lower UK new vehicle registration statistics for September, MMH has released a trading update reaffirming its outlook for FY18. At the interims the company had been cautious about the potential supply side disruption caused by the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) from 1 September 2018. As it had already factored this in, the expectations and thus numbers remain unchanged. The share price weakness in response to the registrations decline appears unwarranted, with a strong yield providing support.
At H118 results MMH noted that the new WLTP vehicle emission testing regime was likely to lead to some supply side distortion in the UK new car market in September and through the rest of 2018. The sharp decline in September registrations, which showed a 20.5% decline, suggest the concerns were justified. Normally the second highest registration month of the year due to plate changes, this was the worst September for registrations since 2011. As a result, H218 profit expectations for MMH were already cautious following a robust H118. The company continues to mitigate the softness in the new vehicle market through cost discipline as well as previous portfolio optimisation actions towards the end of 2017. Used car margins appear healthy, in part due to lower vehicle supply from part exchange and defleeting, and higher margin aftersales activities should also remain robust. As a result, management reiterated its outlook for FY18 overall. Management also reiterated the search for suitable acquisitions, facilitated by a strong balance sheet.
The WLTP introduction requires manufacturers to qualify many more models than under the previous system, including many derivatives of essentially the same make and model. It would appear to have created a bottleneck and a squeeze on some suppliers, with effects apparent across other major European new car markets in September. SMMT stats for example show VW registrations down 55% and Audi falling 53% in the UK last month compared to a year earlier.. The effects should progressively unwind heading into 2019, just in time for Brexit.
MMH’s share price had softened in advance of last week’s registration figure in part due to downgrades amongst its peer group, but this seems unjustified given the company’s previous caution. On our maintained estimates, the shares trade at a FY19e P/E ratio of just 5.5x with an historic yield of 4.6%.