10:43 am, April 14, 2023
Financial services giant Zeus Capital has predicted a strong year ahead for both the new and used car markets after a special report found them to be in ‘good health’.
The firm has taken an in-depth look at the automotive retail market and found that 2023 is likely to be a year of huge volume growth in the new car market, as supply chain issues continue to ease.
Experts also say that any cost pressures which do arrive throughout the year are likely to be offset by dealer groups fulfilling their strong order banks at high margins.
Elsewhere, there was more good news for dealers in the report, with Zeus’s specialists ruling out an impending crash in sky-high used car values.
The study found that franchised dealers in particular are likely to continue earning ‘healthy margins’ on used cars, despite some worries in the EV market.
‘2023 should be a year of volume growth for the new car market due to improving supply of components,’ the report says.
‘The SMMT forecasts (published Feb-23) total new car registrations to rebound 11.2 per cent to 1.794m. New car registration data for the three months to March showed an 18.2% increase year-on-year.
‘We still expect new car margins to be elevated as OEMs favour higher margin models and have an incentive to prevent a glut of supply.
‘The fulfilment of dealer groups’ strong order banks (at high margins) should support sales and profitability for much of the first half of 2023, which should offset some cost pressures.’
‘Used car prices are not showing signs of an impending crash,’ it went on.
‘From 2020-22, there was c. 2.1m lost new car registrations vs. 2010-19 averages and c. 2.5m fewer used car transactions vs. 2014-19 averages.
‘This low supply and unsatisfied demand continues to support used car values. The latest data from Cap HPI showed that trade values of three-year-old 60,000-mile cars increased 0.5 per cent in March, the most positive movement for this month since 2012.
‘Average retail prices from Auto Trader have also held up in recent months.
‘Whilst there has been weakness in EV residual values due to oversupply and price cuts from OEMs, we think franchised dealers will continue to earn healthy margins on used cars, albeit below 2021 and early 2022 levels.
‘Auto Trader reported a nine per cent increase in used car sales in March, based on stock removed from the site, and is seeing faster average times for used cars to sell (26 days in Mar-23 vs. 29 in Mar-19), indicating good market health.’
Dealer group valuations appear ‘exceptionally low’
Another area investigated by Zeus was the valuations placed on dealer groups and how they compared to 2022 levels.
At our recent Car Dealer Live conference in Gaydon, Cambria boss Mark Lavery said that the investment community ‘does not understand automotive’.
He also predicted that there would be no publicly listed dealer groups by the end of the year, due to low valuations which offer amazing value to investors.
Zeus’s experts agreed that firms such as Lookers, Vertu and Pendragon are all being undervalued, and described market valuations as ‘exceptionally low’.
The report says: ‘2023 profit forecasts appear cautious compared to 2022, with a step-down in adjusted EPS of 1.1 per cent on average, or 11.2 per cent when excluding Inchcape.
‘Even on these cautious forecasts, we think the sector is still undervalued. Pendragon, Vertu and Lookers are all trading on 6-7x P/E.
‘The sector has historically traded through-the-cycle on a P/E range of 8-14x, making the current valuations look exceptionally low.
‘The strong trading through 2021 and 2022 has repaired and strengthened balance sheets for most motor retailers.
‘Property portfolios and cash balances underpin share prices.
‘In particular, Vertu is trading below our estimates of FY23 TNAV per share (64.7p). In our view, there remains significant unrealised value in the quoted franchised motor retailers.’
