In contrast to some of its immediate peers, Marshall Motor Holdings (MMH) continues to deliver robust performances in even more challenging UK car markets. Increased revenues and gross profit, with gross margins maintained at 11.4%, limited the fall in H119 PBT to just £0.8m or 5% compared to H118, allowing for the restatement for adoption of IFRS 16. We maintain our underlying PBT estimates for FY19, which are reduced by the non-cash impact from the implementation to IFRS 16 by around 3.6%. We feel recent price weakness was due to company-specific issues at peers. While MMH may be facing a plateau in profitability as UK car markets await clearer economic signals, we feel the yield is supportive while investors await any improvement in fundamentals for the automotive retail sector overall.
MMH’s H119 performance in still challenging markets proved very resilient, especially compared to pressures seen by peers in Q219 used car markets in recent trading updates. MMH again outperformed both new and used markets. The cash performance was also better than expected as highlighted in the July trading update, with period-end adjusted net cash of £5.8m (before lease liabilities). Despite weakness in new car markets and Q219 used car residual value declines, group revenues were up 1.8% and gross margin was maintained at 11.4%. Cost pressure continues to be mitigated by management, which limited the decline in PBT to just £0.8m. Adopting IFRS 16 for lease accounting dilutes PBT by c 4% at the half year and for FY19 but is a presentational adjustment with no cash impact.
The automotive retail outlook remains uncertain primarily due to the overhang on buyer sentiment until the Brexit situation is clarified. Other factors could constrain H219 new car sales such as another round of emissions testing regime changes for manufacturers to manage, which had a significant effect on the supply of certain models in H218. However, given the nature of current year changes and the expected stabilisation of used car selling volumes, H219 may see some modest market improvements.
The yield of 6.1% remains supported by the strong balance sheet, with a NAV of 257p per share and net cash. With the continued resilience of earnings, the FY20 P/E rating in already depressed demand environment of 5.8x looks undemanding.