Investigating revenue

How much will buyers pay for Lookers and Vertu?

One way of identifying a company of having value is to dig deep into the company’s divisional results unless they’ve one division. There could be some divisions with high margins and fetch for a pretty penny, while others will cause write-downs. Below is a look at two car dealerships that have experienced some turmoil in the share price.

 

Lookers

Last year, Lookers sold their “Parts Division” for £120m to Alliance Automotive. That has left them with their core motor business.

But, can analysing their parts division tell us how much the main division is worth?

Keep in mind that Lookers has a market capitalisation of £425m, add in net debt of £134m than the enterprise value comes to £559m.

 

Here are some financial data on Lookers parts division:

-Net Asset was £75.6m, a rise from £37.2m in 2005;

-EBIT margin was earning 6% of sales. Also, very consistent throughout the years;

-Return on segment assets ranges from 8%-12%.

 

If we assume a 20% tax, then after-tax profit was £9.7m and that put it on a P/E of 12 times, which is much higher than current valuation. And on a price to net assets of 1.58 times.

 

How Much Will Lookers Motor Division Fetch?

 

Let’s put it in another way: “Will the £4bn division fetch more than £616.5m in the market?”

 

A few financial data about Motor:

-Net assets of £455.6m, a rise from £113.4m, a compound growth of 13.5%.

-Operating margins of 2%;

-Average Capex to Depreciation of 2.22 times;

-Finally, return on segment assets ranges from 4%-6%.

Is this enough data to decide on a valuation of Lookers?

The answer is no because we haven’t factored in the market price that buyers are willing to pay for car dealers.

Luckily, for us, both Lookers and Vertu have been expanding via acquisitions.

 

Lookers acquires Warwick Holdings Limited

On 4th November 2016, Lookers bought Warwick Holdings Limited for £56.3m.

The following useful financial information is detail below:

-Net Asset is £45.4m;

-Sales of £295.3m;

-Operating profit of £6m.

Here is the extrapolation from this data:

First, operating margin is 2%;

Second, the price/sales ratio is 0.19;

Third, the price to net assets is 1.24.

 

Given that Lookers motor division has a similar operating margin to Warwick Holdings Limited, why not use the price to sales and price to net assets ratios to give a valuation on Lookers.

Using the price to net assets, the valuation would be 1.24*£455.6m = £564.9m. Since their interim results, the new value is 1.24* £505.4m = £626.7m.

If you are using price/sales, then the valuation would be 0.19*£4,088m = £776.72m.

Taking the average would value Lookers at £670.81m (before interim results), or £701.7m, after interim results, which suggest the market is putting a 20% discount on the shares if it were to acquire itself.

 

Vertu

The current enterprise value of Vertu is £122.3m.

Vertu has only one division, that is selling cars at volume and hoping for customers to utilise their aftersales services, which is making 44% in gross margins.

But, the aftersales segment is representing Vertu an ever-smaller proportion of group sales. The revenue mix is down from 10% to 8%, which means it has a smaller influence on overall margins.

 

Net asset is £246.4m, so minus goodwill of £90m will give it tangible net assets of £156.4m.

That is the value Vertu Motors is worth right now, given the uncertainty in the market.  

Summary

The current car dealership market is experiencing some headwind, where the society of motor manufacturers and traders is warning a 5% decline in new car sales. So, a 20% discount on Lookers may not sound cheap enough if things turn out for the worse.

Next, I will look at the car dealership market and will be making a forecast for Vertu and Lookers share price. So, stay tuned!

 

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