1:02 pm, July 22, 2022
New car supply should improve in the second half of the year say OEMs as semiconductor manufacturing ramps up, Covid restrictions are lifted in China, and parts previously made in Ukraine are sourced from elsewhere.
But even if supply issues for components were resolved overnight, the lost output will take a significant time to recover.
That’s according to financial services group Zeus Capital in its half-year ‘temperature check’ of the UK’s automotive retail sector.
Analyst Mike Allen said: ‘The sector showed exceptional resilience and flexibility in the pandemic, followed by very strong trading in 2021.
‘We expect that dealers will once again prove resilient to supply constraints and macro uncertainties.’
Zeus Capital warned that the current new car supply shortages would continue into 2023.
The aggregate 2022 global car sales consensus forecasts for Toyota, VW Group, Ford, Stellantis, Renault, BMW, Mercedes-Benz, General Motors has dropped from 46m in October 2021 to circa 40m.
‘We expect OEMs to continue to prioritise high-margin models and sales channels, ie, retail instead of fleet, which should support dealer gross margins on new vehicles for much of the rest of the year,’ said Allen.
Meanwhile, used car residual values are returning to normal monthly declines but are still supported by low supply, he added.
But he warned dealers that UK consumers were facing ‘an intense spending squeeze which is expected to worsen’, thanks to inflation hitting 9.4 per cent last month and expected to top 11 per cent this year.
‘This inflation, coupled with rises in interest rates and National Insurance, caused the largest recorded year-on-year decline in average weekly disposable income in May – minus 17.6 per cent – according to the Asda Income Tracker.
‘In light of the cost-of-living crisis, GfK’s Consumer Confidence Index is at record lows – a metric which is historically highly positively correlated with new car sales.
‘This data suggests there will be a slowdown in consumer demand, which may worsen in H2 when things like the Ofgem energy price cap rise takes effect in October.’
Allen said: ‘Given that cars are a necessity for many, we don’t see demand disappearing, but consumers may trade down to cheaper models or buy used instead of new.’
He added: ‘A tight labour market, the removal of pandemic-related support, high energy costs and rising interest rates create headwinds for dealers’ earnings in 2022 and beyond.
‘We think the order backlog and waiting lists for new vehicles underpins the franchised dealer 2022 forecasts, but H2 trading will be tougher than H1.’
But in spite of the headwinds and forecast step-down in 2022 profits, Zeus Capital said it believed the sector was undervalued and didn’t reflect forecast profitability and cash generation.
Current valuations of Pendragon, Vertu and Lookers are said to be ‘exceptionally low’ and Allen said: ‘It is difficult to see how these three companies could derate further from here.’
Inchcape is also said to be ‘materially undervalued’ but Motorpoint is trading ‘at a significant premium to the rest of the sector’.
Allen said: ‘For most motor retailers, the strong trading in 2021 has repaired and strengthened balance sheets – we think property portfolios and cash balances help to underpin share prices.’
