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Liberum sees value in motor retailers amid 'sweeping changes'

By Iain Gilbert

Date: Wednesday 05 Dec 2018

Liberum sees value in motor retailers amid 'sweeping changes'

(Sharecast News) - Analysts at Liberum initiated coverage on several London-listed motor retailers on Tuesday, noting the motor industry was facing "sweeping changes" and a margin crunch.
Liberum started Lookers, Motorpoint and Vertu off at 'buy', and issued Pendragon with a 'hold' rating on Tuesday as it said it supply-side dynamics looked set to "shape the future of UK motor retailers more than the vagaries of consumer demand".

In reference to the challenges facing the industry as a whole, Liberum quoted Ford chief executive James Hackett who recently noted that "sweeping changes, brought about by propulsion technology, shared mobility and artificial intelligence" had coupled with long-term structural changes and shorter-term trading pressures from the likes of Brexit, WLTP emissions testing regulatory changes, trade wars and China demand to create a margin crunch for original equipment manufacturers.

The broker said dealers with the strongest balance sheets and best track records would drive consolidation, as well as improving sales and profit densities.

Liberum slapped a 138p target price on Cheshire-based Lookers, stating the group had "the best metrics" in its franchised peer group in terms of sales and earnings per dealership.

"This is a more fully formed business than Vertu, and is balanced between premium and volume franchises, however, there is still plenty of scope to grow."

Despite a "difficult couple of years", Liberum gave Vertu a 56p target price. The broker feels Vertu is a "well-run company", primed to consolidate that market and drive longer-term growth as it works through its turnaround efforts.

Over at Motorpoint, which Liberum said "stands apart from franchised dealers due to its low-cost, high turn, standalone used care model", the firm was tasked with a target price of 285p per share, highlighting that the group's small 4% market share would likely improve if suppliers were to channel more through Motorpoint, rather than disintermediate.

"While lower new car registrations will feed through to reduced supply, Motorpoint has plenty of scope to grow market share from the current 4%, from both mature and new sites."

Lastly, Liberum gave Pendragon a target price of 24p on Tuesday, saying its analysts were "not convinced" by its standalone used car proposition, where market share gains had "come at a cost".

While the broker noted it liked Pendragon's software business, it believes it is unlikely to "be a game changer".

"We think that even revised management guidance for FY18E looks optimistic. Proceeds of £100m for the US business could provide short-term upside, but despite this, the longer term risk/reward profile is not attractive."


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