Mike Allen, head of research at Zeus Capital, the independent financial services group, paints a complimentary picture of the four main UK dealer groups’ performance during 2022 and explains why their share price belies their operational strength.
2022 was a year to forget for most investors as share price performances were typically poor due to the war in Ukraine, accelerating inflation, monetary policy tightening, continued Covid-19 locks in Asia, industrial action, the cost-of-living crisis unfolding – the list goes on.
However, from a UK automotive retail perspective, most PLC groups typically performed well operationally and look likely to hit our FY22 earnings projections, but this was not reflected in share price performance.
The data shows the FY22 financial performance to be, on average, 41.9% below its full-year 2021 peak, though there is significant variance within this. This is because both Lookers and Pendragon benefited from restructuring gains made during Covid-19, with Motorpoint suffering several profit warnings during the year. In 2023, Vertu will benefit from its acquisition of Helston, and Motorpoint will enjoy organic expansion, while estimates for Lookers are more conservative.
Overall, it will be tough for PLC groups to exceed their financial performance in FY23 vs FY22 significantly, but PLC valuations remain low by historical standards thanks to the current levels of economic uncertainty coupled with rising interest rates.
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However, we believe the markets are seeking assurance that inflation and interest rates have peaked, and once that is the case, we would expect markets to reopen and valuations to improve from here.
The financial performance across the sector, in general, was healthy coming out of various COVID lockdowns from 2020, and we all knew that the used car price performances of 2021 were never going to last.
As a result, we had been careful not to extrapolate the super normal profits generated into 2021 into 2022 and, on average, assumed PLC dealer group adjusted profit before tax forecasts would be 42% below 2021 peak levels on average. Nevertheless, high super-normal profits resulted in strong cash generation, leaving most dealers with net cash positions going into 2022.
Philip Nothard, Insight and Strategy Director at Cox Automotive, adds: “Looking ahead, the industry in 2023 could face another perfect storm of ongoing supply pressures with deteriorating demand as the cost-of-living crisis and economic recession starts to bite. However, the PLC dealer groups have faced significant challenges before and have robust balance sheets and strong management teams that can quickly adapt their businesses in a crisis. Of course, against a challenging backdrop, we will see significant change with the birth of agency and ongoing growth in EV vehicles.
“2023 will not just be about risks and challenges in our view. We also see opportunity through change, and those most nimble dealers will spot opportunities throughout the supply chain in nearly new, used cars; finance and aftersales will typically triumph. We anticipate that most of the PLC Groups will be in this category and adapt, grow, consolidate, and continue to churn out a respectable financial performance. Perhaps one day, investors will recognise this, and they might get the credit they deserve.”
This article first appeared in AutoFocus, Cox Automotive’s quarterly insight update.