Marshall Motor Holdings: Strong performer but facing headwinds

Marshall Motor Holdings (LON:MMH) is principally involved in the sale and repair of new and used vehicles. It operates over 100 franchises across England, plus a total of 14 trade parts specialists, used car centres, body shops and inspection centres.

Overall, it has a diverse portfolio, spanning 80% of all brands of new vehicle sales. Of late, the company has managed to grow its profit and maintain its gross margin by cost-cutting, controlling discretionary expenditure, and selling loss-making operational sites, the latter contributing to turning net debt of £100 million last year into a net cash surplus.

MMH’s performance is impressive given the new car sales market is undergoing contraction (6% in H1). But by the Chariman’s own admission (in March 2018), the company “remains cautious about the UK car market in 2018 as it returns to a more normalised level.”

That level of caution was extended to “the remainder of the year and into 2019” by MMH’s Chief Executive in August. It is merited, if a recent BDO report into the automotive sector is to be believed. “Automotive retail has a number of challenges and frustratingly not many of these are in the dealers’ control,” it noted. 

The accounting and financial firm’s poll found that 65% of dealers expect their profitability in 2018 to be lower than 2017. Further, they say registrations have fallen by 7.5% to the end of September 2018, with a significant drop of 20% in the September sales as a result of the impact of the new WLTP regulations.

Much of this would be felt by market players such as MMH, so our take based the company’s annualised H1 2018 figures:

For: Very good revenue per share generation, low PE, negative net debt, good (if not fantastic) RoE at 22%, net assets per share is 1x  [ideally should be above 1x], diverse brand portfolio, geographically diverse operating sites, plus a diverse spread of franchises (101) across the UK.

Against: Interest cover of just 2x does not leave much room for downturns in operational cashflow, current ratio under 1x, substantial goodwill, low dividend. An uncertain outlook for the car market (including new testing regime, uncertainty over diesel engines, economic uncertainty, Brexit, supply of cars from manufacturers, changes in customer expectations and buying habits, recruitment and retention of staff). 

Conclusion: Good revenue, strong balance sheet and attractive RoE, but headwinds ahead for the sector that could send its shares into another tailspin.