BUY: Vertu Motors (VTU)
While City analysts have raised the specter of price cuts in the sector, the firm still looks well positioned, writes Christopher Aker.
The share price of Vertu engines rose 4% as investors appreciated the auto retailer’s confirmation of record annual revenues, supported by rising vehicle prices and the impact of acquisitions. The market was also pleased with the news on the return of capital, with a dividend increase and a further £3m share buyback programme.
Much-discussed supply constraints in the auto market have supported high prices and increased revenues. Nonetheless overall volumes were down 0.4% for the year, with the number of used vehicles down 7%.
Management believes that “UK used car price dynamics are unlikely to change in 2023, even if average prices remain high.” The average selling price of used and new vehicles increased by 12% to £19,987 and 10% to £24,128 respectively, compared to last year. Whether those gains will continue to be seen is another matter. Analysts at investment bank UBS argued in a research note last month that the price reductions seen in the electric vehicle (EV) market could soon spill over into traditional cars due to supply and demand dynamics. Watch this space.
Elsewhere, there were positive rumors of the integration of the acquisitions, which helped the company’s store count grow by a whopping 31 stores for the year and contributed £183m in revenue. Vertu acquired the Helston garage group in December, which the board still expects to deliver over £3m of synergies in 2025, and also bought two BMW Motorrad sites.
This activity in the market has seen Vertu go from a net cash position of £16m last year to a net debt position of £75m, excluding lease liabilities, this time around. But this seems manageable. Management is optimistic that future free cash flow generation, which has increased by £10m year-on-year to over £54m, will see debt decline.
On the cost side, wage inflation remains a key concern, as labor is the company’s largest operating cost. Wage costs increased by more than £14 million, year on year. While the company isn’t immune to a tight job market, it’s making progress on that front. Job vacancies have fallen from a high of more than 500 last year to around 300.
Current trading is encouraging, with trading profits in March and April up from last year despite cost challenges. And a six-fold forward earnings valuation, according to FactSet, looks unchallenging compared to the auto retailer’s competitors like Motorpoint.
BUY: Compass Group (CPG)
The contract food service updated its guidance after a strong start to the year, writes Jemma Slingo.
Compass Group has been impressively successful six months of negotiation. The company now expects to achieve operating profit growth of nearly 30% in fiscal 2023, up from its previous target of “over 20%. Meanwhile, organic revenue growth is expected to reach 18% and operating margins they should be slightly higher than expected at 6.7-6.8%.
The group’s confidence is underpinned by strong performance across the board. All sectors and regions reported double-digit organic sales growth in the six months to March 2023, and net new business growth was also well balanced, with each region growing between 5% and 6% . This is significantly higher than Compass’ historic growth rate of 3% and eases concerns that the office catering division would struggle in the wake of Covid.
Compass chief executive Dominic Blakemore believes outsourcing trends are playing in the group’s favor despite “pockets” of macroeconomic weakness. “We believe many of the complexities that drive outsourcing, such as increased regulation, changing customer and consumer expectations, and inflation, are here to stay,” he said.
Strong demand is translating into excellent earnings growth. Adjusted operating profit jumped 41% year on year to £1.05 billion, well above pre-pandemic levels. The statutory figures were dampened by a £70m portfolio restructuring charge and £61m acquisition-related costs. However, earnings growth was still impressive at 37.6%.
This, in turn, translated into excellent cash generation: free cash flow reached £590m in the first half of 2023, up from £360m a year earlier. As a result, the group announced a new £750m share buyback and increased its semi-annual dividend by 60%.
With a forward price-earnings ratio of 22.3, Compass isn’t cheap and there’s a risk the restaurateur is still enjoying a post-Covid rebound that will fade over time. The group’s operating profit margin has also yet to recover from the hit of the pandemic (it stood at a comfortable 7.4% in 2019).
However, margins are moving in the right direction, despite the high mobilization costs associated with new customers, and the demand for restaurant services is growing. Compass’ experienced management team and excellent record are the final accompaniment.
WAITING: Treaty (TET)
The reopening of the Chinese market boosted adjusted profits for the fragrance and flavor maker, writes Mark Robinson.
As with many other companies, by Treatt performance over the past 15 months depended on its ability to recoup rising input costs from its customer base. Its latest semi-annual data suggests it has been moderately successful on that score.
The company reported a 70 basis point increase in its gross margin to 28.2%. Reported earnings were down on the previous half-year, although last year’s figures benefited to the tune of £2.72bn (net) from the sale of Northern Way premises and relocation charges, while this time the company it was saddled with net charges to the tune of £542m in the round.
Early in the pandemic, the firm had already decoupled its financial performance from key citrus price changes as it sought to reduce its exposure to commodity price vagaries. And it was the heightened focus on its value-added citrus products, coupled with nimble cost-shifting measures, that enabled Treatt to drive adjusted profitability. The citrus sector’s revenues increased by a third, which means that its share of the overall top line increased by 21.6 percentage points to 54.2%. Sales to beverage customers increased during the period, suggesting that demand may be to some extent price inelastic in this segment of the consumer goods market.
Just under a year ago, the trade outlook deteriorated due to lower-than-expected demand for tea in the United States coupled with severe Covid-related restrictions in place in China. While sales in the tea category declined proportionally, management expects volumes to improve in the second half, while the reopening of China’s economy has seen sales in the region increase by 38.6%.
Further growth is in sight through the coffee segment. Demand for the company’s natural coffee extracts generated only 2.6% of overall sales, but the percentage is constantly growing. Management said that “while still in its infancy, the growth in coffee sales is promising and provides optimism about the breadth of opportunity.”
Treatt entered the second half with a strengthening backlog and sales pipeline, but commodity inflation shows little sign of abating. There must be a limit to how much costs can be passed on before consumer demand falters. Thus, while the long-term outlook remains encouraging, caution is warranted until input costs moderate. We reiterate our earlier advice with shares trading in line with their historical average at 30x consensus earnings.
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