BUY: Vertu Motors (VTU)
While City analysts have raised the spectre of price cuts in the sector, the company still looks well situated, writes Christopher Akers.
The share price of Vertu Motors rose by 4 per cent as investors enjoyed the automotive retailer’s confirmation of record annual revenues, boosted by higher vehicle prices and the impact of acquisitions. The market also liked the news on the return of capital, with an increase in the dividend and a further £3mn share buyback programme.
The much-discussed supply constraints in the car market supported elevated prices and boosted revenues. This was despite overall volumes falling by 0.4 per cent in the year, with used vehicle numbers down by 7 per cent.
Management thinks that “UK used car pricing dynamics are unlikely to change in 2023, even though average prices remain high”. The average selling price for used and new vehicles rose by 12 per cent to £19,987 and 10 per cent to £24,128 respectively, against last year. Whether such gains will continue to be seen is another question. Analysts at investment bank UBS argued in a research note last month that price cuts seen in the electric vehicle (EV) market could soon spread to traditional cars due to supply and demand dynamics. Watch this space.
Elsewhere, there were positive noises on the integration of acquisitions, which helped the company’s number of sale outlets rise by a net 31 in the year and contributed £183mn of revenues. Vertu picked up garage group Helston in December, which the board still expects to deliver over £3mn of synergies in 2025, and also bought two BMW Motorrad sites.
This activity in the market meant that Vertu pivoted from a £16mn net cash position last year to a £75mn net debt position, excluding lease liabilities, this time around. But this looks manageable. Management is bullish that future free cash flow generation, which was up by £10mn year-on-year to over £54mn, will see debt fall back.
On the costs side of things, wage inflation remains a key concern given that labour is the company’s biggest operating cost. Salary costs rose by over £14mn, year-on-year. While the company is not immune to a tight labour market, it is making progress on this front. Vacancies have fallen from the highs of over 500 last year to around 300.
Current trading is encouraging, with trading profits in March and April up on last year despite cost challenges. And a forward earnings valuation of six times, according to FactSet, looks undemanding against car retailer peers such as Motorpoint.
BUY: Compass Group (CPG)
The contract caterer has upgraded its guidance after a strong start to the year, writes Jemma Slingo.
Compass Group has had an impressive six months of trading. The company now thinks it will achieve operating profit growth of almost 30 per cent in financial year 2023, compared with its previous target of “above 20 per cent”. Meanwhile, organic revenue growth is expected to reach 18 per cent and operating margins are due to be marginally higher than anticipated at 6.7-6.8 per cent.
The group’s confidence is underpinned by strong performance across the board. All sectors and regions achieved double-digit organic sales growth in the six months to March 2023, and net new business growth was also well balanced, with every region growing in the range of 5-6 per cent. This is significantly higher than Compass’s historical growth rate of 3 per cent, and eases concerns that the office catering division would struggle in the wake of Covid.
Compass chief executive Dominic Blakemore believes outsourcing trends are working in the group’s favour despite “pockets” of macroeconomic weakness. “We believe that many of the complexities that drive outsourcing, such as increased regulation, changing client and consumer expectations, and inflation, are here to stay,” he said.
Strong demand is translating into excellent profit growth. Adjusted operating profit jumped by 41 per cent year on year to £1.05bn — well above pre-pandemic levels. Statutory figures were damped by a £70mn charge relating to portfolio restructuring and £61mn of acquisition-related costs. However, profit growth was still impressive at 37.6 per cent.
This, in turn, translated into excellent cash generation: free cash flow reached £590mn in the first half of 2023, compared with £360mn in the previous year. As such, the group has announced a new £750mn share buyback, and has raised its half-year dividend by 60 per cent.
With a forward price/earnings ratio of 22.3, Compass doesn’t come cheap, and there is a risk that the caterer is still enjoying a post-Covid rebound that will wane as time goes on. The group’s operating profit margin has also yet to recover from the blow of the pandemic (it sat at a comfortable 7.4 per cent in 2019).
However, margins are moving in the right direction — despite high mobilisation costs associated with new clients — and demand for catering services is building. Compass’s experienced management team and strong record are the final garnish.
HOLD: Treatt (TET)
The reopening of the Chinese market has boosted adjusted profits for the fragrance and flavouring manufacturer, writes Mark Robinson.
As with so many other companies, Treatt’s performance over the past 15 months has depended on its ability to claw back rising input costs from its customer base. It’s latest half-year figures suggest that it has been reasonably successful on that score.
The company recorded a 70 basis point increase in its gross margin to 28.2 per cent. Reported profits were down on the prior half year, although last year’s figures benefited to the tune of £2.72bn (net) from the disposal of Northern Way premises and relocation expenses, whereas the company was lumbered with net expenses amounting to £542mn this time around.
By the onset of the pandemic, the company had already decoupled its financial performance from shifts in key citrus prices as it sought to reduce its exposure to the vagaries of commodity pricing. And it was the intensified focus on its value-added citrus products, along with nimble cost pass-through measures, which enabled Treatt to drive adjusted profitability. Revenue at the citrus business was up by a third, which meant that its share of the overall top line increased by 21.6 percentage points to 54.2 per cent. Sales to beverage customers increased through the period, suggesting that demand could be price-inelastic to an extent in this corner of the consumer goods market.
Just under a year ago, the trading outlook had soured due to lower-than-expected demand for tea in the US, together with the severe Covid-related restrictions in place in China. Although sales in the tea category were down on a proportional basis, management expects that volumes will improve over the second half, while the reopening of China’s economy has seen sales into the region increase by 38.6 per cent.
Further growth is in the offing through the coffee segment. Demand for the company’s natural coffee extracts only generated 2.6 per cent of overall sales, but the proportion is growing steadily. Management said that “although it remains early days, coffee sales growth is promising and provides optimism for the breadth of opportunities”.
Treatt entered the second half with a strengthening order book and sales pipeline, but raw material inflation shows few signs of abating. There must be a limit to the extent to which costs can be passed on before consumer demand falters. So, although long-term prospects remain encouraging, caution is warranted until input costs moderate. We reiterate our previous advice with the shares trading in line with their historical average at 30 times consensus earnings.
