Marshall Motor Holdings (MMH) released a trading update, which indicates that the group’s Q4 performance is now expected to be ahead of management and market expectations. Driven by stronger than anticipated used car sales with healthy margins, PBT is now expected to exceed FY17’s record level for the continuing business. We are increasing our FY18e PBT and EPS by 6.4%. Brexit uncertainty remains at the forefront of FY19 prospects, and as some of the currently favourable market dynamics may wane, we leave our FY19 estimates unchanged. The P/E ratio for FY19 is an undemanding 5.8x.
The disruption and volatility seen in the supply of new cars that arose from the introduction of the Worldwide Harmonised Light Vehicle Testing Procedure (WLTP) emissions regime from 1 September 2018 has had some positive consequences. With constrained supply of certain new models, buyers appear to have switched to replacing cars with nearly new models. As a result, used car sales were higher than expected with healthy margins maintaining the 37 basis point rise for the segment seen in H118. The period also compares to a weak trading period in Q417. New car shortages are also thought to be benefiting margin, albeit on lower volumes. We increase our FY18 revenue expectations for MMH by 0.4% and our EBIT by 4.8%. Our FY18e PBT increases 6.4% to £25.7m from £24.2m previously, and compares to £25.4m for the ongoing businesses in FY17. FY18e EPS also increase by 6.4%.
The effects of the WLTP on some manufacturers are likely to persist into Q119, so no latent bounceback in demand for those new models should be expected. This could mean the positive trends currently being experienced may persist for that period, despite the ongoing disruption to diesel demand arising from muddled government policy. The impact of Brexit remains a major uncertainty, but generally not a favourable one. If used car demand recedes as the year progresses due to recovering new car sales, some adverse margin pressure may arise, compounded by ongoing cost pressures. While management has mitigated these in FY18, there is less scope for cutting costs through portfolio streamlining. We therefore take a cautious view of FY19 prospects, leaving our numbers unchanged.
MMH currently trades on just 5.8x our FY19e EPS, a discount of over 20% against its immediate UK auto retailer peer group. The better than expected performance should encourage this value gap to diminish, supported by the healthy yield.