7:51 am, December 7, 2023
Vertu Motors has slashed its profitability predictions for next year due to weakening used car values and new car supply ‘exceeding natural demand levels’.
The listed dealer group – which has 195 sales and aftersales outlets – posted a trading update to the London Stock Exchange this morning (Dec 7), in which it outlined ‘negative market factors’ have lead it to downgrade forecasts.
Analysts Zeus Capital has lowered its Vertu FY24 forecast by £8m to to £39.3m and FY25 by £3.2m (6.2%) to £48.6m.
Liberum, meanwhile, cut its FY24E profit-before-tax forecast by 17% and by 12% for FY25E.
Vertu’s share price fell by 19.3% to 68.4p at opening this morning.
The trading update focused heavily on wholesale used car values which, said the company, have experienced ‘a significant reduction’ over the past two months.
Vertu quoted Cap HPI figures of a 4.2% fall in trade values in October and November – a record monthly decline.
Prices of premium cars have been affected hard, the firm said – something it first experienced in September.
Cap HPI reported drops of between seven and 11% per month in the premium sector.
Vertu said it tweaked prices of used cars using its ‘pricing algorithm’ to ‘ensure vehicles were priced effectively, to ensure increased stock turn and thus a reduction in group inventory levels’.
Like-for-like used car volumes fell by 2% during the three months to November 30 – a rise on the 5.7% reduction in the first half of the financial year, but profits were ‘below those anticipated’.
Vertu said it expects used car values to ‘continue to weaken above historic norms in the near term’, but once prices have levelled out, consumers will have access to more affordable cars and margins should stabilise.
‘Reducing interest rates in the medium-term would also aid affordability and provide a further stimulus to a market benefitting from increased supply’, Vertu added.
Retail demand for new cars is ‘muted’
More new car supply has also lead Vertu to trim profitability predictions for FY24.
The dealer group remarked an increase of 18.6% in new car registrations to November 2023 was due to ‘significant product flow into the fleet market, whereas new car retail volumes have only marginally increased’.
‘Retail demand has become increasingly muted in recent months, and this is particularly the case for battery electric vehicles,’ the update said.
Vertu also pointed out margins on new cars have continued to reduce to more normal levels due to more supply coming into the market, leading to it making greater gross profits. The same is true for fleet and commercial volumes, it added.
Overall, new vehicle supply has started to exceed natural demand levels, ‘leading to an increased pipeline of new vehicle inventory, which, when combined with higher interest rates, has increased manufacturer stocking interest charges significantly above expected levels,’ said Vertu.
Strong aftersales demand and more technicians helped Vertu to drive increased revenues and gross profits in the three months to November 30, compared to the same period last year.
Vertu CEO Robert Forrester said: ‘The current consumer environment remains volatile and recent trends of sluggish new car retail demand and weakness in used car pricing are likely to persist for some months.
‘Vertu remains very focused on delivering outstanding customer experience, tightly controlling inventory and being diligent on costs.
‘The group has a strong balance sheet and long track record of operational excellence and financial discipline. These attributes mean we remain very confident in our ability to take advantage of these challenging market conditions and the resulting increased opportunities in the sector.’
Zeus Capital surmised that even though the downgrade has been made due to market conditions in vehicle supply, the impact of the correction ‘will be relatively short term as falling prices should increase affordability and stimulate demand’.
The listed group is still ‘undervalued’, Zeus reiterated , ‘particularly given Vertu’s strong asset backing’.
Liberum remarked: ‘While this [cut] is disappointing, the balance sheet is strong and the longer-term consolidation thesis is intact.’
