The motor retail sector is emerging from the recession battered and bruised but also leaner and fitter. Against all the odds it has also collectively generated more profit than anyone could have predicted at the turn of 2009 when groups braced themselves for worst case scenarios. These are amongst the findings of BDO’s Motor 150 Report.
BDO analysed the top 150 motor groups by turnover and produced aggregated accounts in the form of a financial report as though they were a single entity. All the financials are based on the most recent year-ends which covered the pivotal 2009 financial year.
The results are encouraging. The bottom line shows the Motor 150 collectively went back into pre-tax profit in 2009; an achievement which is made all the more impressive as turnover fell 4.2 per cent from £36.1bn to £34.6bn. While the group collectively lost £198m in 2008 they returned a profit of £360m. Not bad for a maturing sector which saw sales go into freefall at the beginning of its financial year.
The main drivers for such a strong performance included the success of the scrappage scheme, the increase in used car values, the positive impact of cost cutting measures taken since the credit crunch, good support from car manufacturers and low interest rates.
Quite unexpectedly, against a backdrop where everyone was predicting that 2009 would be a really tough year, it turned out for many to be a year of impressive profitability. Over half of the companies in the top 150 reported profits of over £1m compared to only 33 in the previous year.
BDO’s research shows the number of top 150 groups making a loss reduced significantly from half in 2008 to 28 in 2009. A good rally but still an indication that some groups are likely to struggle in 2011 especially with the new car market expected to dip below the 2 million mark to 1.93 million, according to the SMMT.
The report found that net debt, excluding group loans, was reduced over the period with the Motor 150 carrying £2bn debt compared with £2.6bn in the previous year.
Despite the banks’ caution, the stock market felt able to support the sector, noticeably Lookers, who in June 2009 announced a fully underwritten Firm Placing and Placing and Open offer to raise £78m to facilitate significant improvements to its bank facilities, pay down debt and provide funds for future development strategy.
This share issue received strong support from existing shareholders and brought in several new institutional shareholders. Later in 2010 the company’s share price surged on the back of a potential private equity offer of £346m against net assets of £160m and a market capitalisation of £188m at the end of 2009.
The fast growing Vertu Motors also raised £30m by a placing in June 2009 enabling its acquisition plans to continue. Its total outlets increased by half, from 44 to 66 from May 2009 to 2010.
The Motor 150 companies found themselves with extra cash reserves due to low interest rates and used it to pay off debts rather than spend or invest in an uncertain future.
Clearly the progress made by the Motor 150 groups place them in a competitive position to face the undoubted challenges of 2011; a year without scrappage but with public sector cuts that will impact jobs and confidence.
2011 will be a challenging year of uncertainty for new car sales. There is also a risk that dealers may bolster bonuses by pre-registering cars, tying up working capital and leading to savvier consumers seeking nearly new vehicle deals, at the cost of margin.
Even allowing for the impact of the public sector cuts fleet sales could provide a welcome boost to dealer businesses as operators will need to replace ageing vehicles or face prohibitive maintenance costs and see their resale appeal diminish.
We expect an overall increase in fleet volumes. The fleet market has lacked finance, but, given residual value resilience, there may be more financing opportunities especially with captive funders.
The motor retail industry has proved that it is remarkably resilient by producing good profits over the past two years – dispelling the forecasts of doom. Will 2011 be the 2009 that many expected? Our view is that, although 2011 will provide challenges, fresh prophecies of doom will remain unfilled.