Investors’ Chronicle: Vertu Motors, Dignity, James Halstead

BUY: Vertu Motors (VTU)

The car dealership is still benefiting from the widespread shortage of vehicles, writes Jemma Slingo.

Between March and August this year, Vertu Motors sold significantly fewer cars across all of its divisions than in the same period of 2021. The dealership’s revenue, however, is up by 4 per cent, hitting £2bn for the first time.

This is because the industry’s notorious supply chain issues continue to push up prices of new and used vehicles. According to Vertu, the average used car now goes for £19,958, almost a quarter more than in the first half of 2021. Meanwhile, drivers typically pay £24,294 for a new vehicle, up 13 per cent year on year. The shortage of stock, therefore, is being more than counterbalanced by higher price tags.

Despite the supply constraints — or, perhaps because of its strong relationship with manufacturers — the group has managed to build its market share to become the fourth-largest automotive retailer in the UK by revenue. And in a further effort to please shareholders, Vertu has boosted its dividend and announced another £3mn share buyback scheme.

Costs are now the thing to watch. Excluding the government support Vertu received in 2021, operating costs have risen by 11 per cent. This increase has been fuelled by wages, which are Vertu’s biggest operating expense and which have risen by 9 per cent year on year.

Chief executive Robert Forrester said government support for business energy costs and the reduction in employers’ national insurance contributions will prove helpful in the second half of 2022. However, the group still has 400 vacancies to fill and the UK labour market remains very tight.

Looking further ahead, some commentators have argued that the traditional car dealership model — with forecourts and enthusiastic salesmen — will not last. Shopping online for cars, they say, will become the norm.

The travails of online car dealerships such as Cazoo potentially undermine this view, and Vertu is still opening plenty of new physical outlets. However, it is also focusing on digital transformation, appointing its first chief technology officer in April. Plus, it has proved willing to adapt in the past: in 2017, it says it became the first UK dealership to offer full online retailing of used cars.

The more pressing issue is whether people will keep buying cars as the cost of living crisis deepens. However, given that Vertu’s forward price/earnings ratio sits at just 5.7 — well below that of Pendragon and Motorpoint — we are willing to take a risk.

SELL: Dignity (DTY)

The company struggled in a tough half for revenue and recruitment, writes Christopher Akers.

Dignity fell to an eye-watering pre-tax loss on the back of a chunky impairment charge, lower death numbers, labour shortages, and a lower-price model. The funeral provider, which runs more than 750 locations across the UK, was boosted on the day before these results were released after an announcement that class A bondholders of group subsidiary Dignity Finance had voted in favour of a deleveraging proposal which should hopefully improve the capital structure. But the good news didn’t last for long.

Dignity investors hoping for more green numbers on their dashboards were disappointed as market sentiment once again turned negative and the shares plunged downwards as the group revealed that it had put through £63mn of impairment charges in the half due to “slower funeral market share growth combined with more branch direct cremations rather than full adult funerals being performed than originally anticipated”. Funeral market share was up by 40 basis points to 12.4 per cent and crematoria market share by 90 basis points to 12.3 per cent.

Funeral share growth troubles were pinned on recruitment difficulties. Dignity switched off most marketing activity from January as it struggled with severe staff shortages, and it has over 400 live vacancies. It seems like potential employees are not jumping at the chance to be a part of the post-pandemic death sector. Chief executive Kate Davidson said “we are having to hold back until we can handle the calls and additional work” and the situation “may have had a negative impact on volume and share”. Indeed.

While the labour and marketing travails didn’t help with revenue generation, a downturn in sales was not surprising given the death rate was lower than the comparative period. According to Office for National Statistics data, the number of deaths in the half was 319,000, a fall of 6 per cent. But the company’s new pricing model, which is intended to make it more competitive, hasn’t yet resulted in great success with funeral volumes falling. The next set of pricing adjustments is expected in October. 

Peel Hunt analysts said this year that “management has clearly decided that radical action is required to improve the business’s price proposition and counteract the forces of more people checking prices online and the trend to direct funerals”. Based on these results, the plan isn’t working. And the labour shortages are a major concern.

HOLD: James Halstead (JHD)

The flooring company may pause production to bring supply back in line with demand, writes Michael Fahy.

The oft-discussed bullwhip effect, which has led to companies building large stocks of inventory to cope with supply chain stresses only to then be hit by weaker demand, is in evidence at floorcoverings manufacturer.

The company’s inventory stood at £112mn at the year end, an 85 per cent increase on the prior year. This had a knock-on effect on its net cash, which, at £52.1mn (excluding leases) reduced by £31.2mn during the year.

Its operating profit was largely flat despite increased sales as it had to contend with higher fuel and energy costs. Chief executive Mark Halstead described a decline in its trading margin as “acceptable, given the flood of cost increases that we have in part passed on” but he warned that the autumn and winter could bring deeper problems.

Overcapacity in the sector has already claimed one competitor, which fell into receivership, and Halstead said that the company might have to temporarily suspend some production to bring stock back to normal levels. The company also said it wouldn’t lift its final dividend as it focuses on cash resources.

Sales have been maintained since its year end, though, and it has passed on most price increases. Although the company will suffer some higher costs due to sterling’s fall against the dollar, the fact that it exports heavily “will have some positives”, Halstead said.

Analyst Panmure Gordon maintained its buy recommendation on the stock, nudging up its earnings forecast for the current year to 9.8p a share. The shares trade at 21 times this level even after a 29 per cent year-to-date decline.

The company is a well-respected operator, but with the outlook darkening — the latest Purchasing Managers’ Index data shows manufacturers’ orders are in decline, with customers either postponing or cancelling purchases — we stick with our hold recommendation.