The period since September has been an interesting time for the publicly listed motor retailers. While the trend has been overwhelmingly positive for 2009, there have been some significant falls recently.
All of the businesses have provided encouraging trading updates, however the current levels of profitability had already been built into the share prices over the summer months.
Looking in more detail at the reporting of the trading announcements, the majority of the reasons for the improvement in performance when compared to 2008 has been attributed to the government’s scrappage scheme. While this has undoubtedly had a positive effect, in profitability terms improvements in the used vehicle market and cost cutting measures taken in 2008 have provided at least as much of a boost to the bottom line.
Both the retailing sector and the stock market are aware that the scrappage scheme will come to an end and this is one of the significant reasons behind the recent share price reductions.
If the end of the scrappage scheme was the only factor impacting the sector then we would expect a comparative improvement in the market sentiment towards businesses concentrating on premium franchises, such as HR Owen.
But this is not the case and, in line with the market, we expect 2010 to be a challenging year with the end of scrappage combining with a slowly recovering economy, an increase in VAT, new taxes on vehicle purchases, a reduced service parc and an uncertain used vehicle market.
These factors appear to be being built into the share prices, with the educated commentators already noticing the recent softening in the used car market. We are therefore likely to see a continuing split in the sentiment of profit updates emanating from the listed motor retailers.
Current year profitability is likely to remain strong with delayed deliveries of scrappage vehicles and a rush in advance of the VAT increase and expected price rises boosting the results for the end of 2009. This will be matched, however, with a cautious outlook for performance in 2010 which may well keep stock values depressed.
Covenant compliance should be less of an issue for the current year with the majority of the listed retailers having boosted their equity through rights issues and their net worth through healthy profits in 2009 although increasing stock levels of both new and used vehicles present a downside risk.
Overall, we should therefore avoid the drastic share price falls which resulted in businesses entering 2009 with a heavy risk discount.
If you have any questions concerning the above, please contact me on 0161 493 1930.
