Marshall Motor Holdings (MMH) remains one of the most progressive automotive retail groups in the UK. It has the management experience and financial strength to continue its strategy to drive organic performance by outperforming UK car markets, augmented by appropriate value-creating acquisitions. Market challenges over the last few years have been numerous and persistent, but MMH has delivered a robust performance during the period, including in H119. The share price has recovered modestly since the H119 announcement, but MMH’s rating does not reflect its robust performance, with the support of a healthy dividend yield.
MMH delivered a resilient performance in H119 (see our 13 August update note), with volumes outperforming both new and used car markets in the UK. Markets remained depressed by buyer uncertainty induced largely by Brexit and emissions issues, which continued to disrupt the supply side as new vehicle testing rules are implemented. After selling its lease business in late 2017, the group has remained essentially ungeared, ending H119 with a better than expected adjusted net cash balance of £5.8m (before lease liabilities). The encouraging cash inflow was despite buying six Skoda dealerships for £5.2m (including a freehold site), and a £6.0m one-off payment to clear all defined benefit pension obligations. As the investment programme in dealership facilities should reduce from FY20 as 87% of the site upgrades are complete, cash generation should improve further.
Following the transformational acquisition of Ridgeway Group in 2016, MMH has continued to optimise its business and dealership portfolio while seeking suitable value-creating acquisition opportunities. We expect the increasing financial burdens to maintain dealership facilities and invest in technology to drive continued sector consolidation towards larger groups. Given the current market challenges and the reduced financial market valuations, more opportunities might be expected to arise. MMH is well positioned to participate given its strong balance sheet, as was evidenced by the purchase of six Skoda and two Honda dealerships this year.
As downturn concerns have persisted over the last couple of years, auto retail companies have continued to experience multiple contraction. MMH is trading on 6.4x CY20e P/E, a small premium to its peers, which discounts considerable postBrexit earnings risk. Any improvement in trading should lead to sector-wide multiple expansion, combined with improving earnings growth.
