Marshall Motors – One to keep an eye on

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In the last few days I’ve been analysing a company with an impressive profits history and a sound balance sheet, Marshall Motors (LSE:MMH).  It shares have gone nowhere since it launched on the stock market in spring 2015 at 149p, being held back by widespread fear over the retailing of cars in the UK.  Indeed, UK new car sales volumes have fallen by over 15% since the peak in 2016, and they are still falling.

So, we might expect this economic backdrop to put a real strain on Marshall Motors.  And yet, it has remained consistently profitable and optimistic; it recently raised the dividend by one-third to send 8.54p to shareholders.  That is a dividend yield of 8.54p/152p = 5.6%.

Given the history, the strong strategic positioning and strong finances we might expect a continuation of dividend rises; maybe not increases at such high percentage rates, but a modest nudging up in the future.  That is an attractive prospect.

But, on the darker side, we have two issues to consider, one external and one internal. The external threats are plain for all to see: I, unlike others, still have faith in “experts”, rather than political spin doctors, so I’m conscious of the potential for a serious economic downturn in the near future.  Nationally, car sales might decline by even greater percentages in the next two years than they have in the last two.

The internal problem is that many of Marshall’s staff do not like the middle and senior managers, as reflected in comments made on Indeed.co.uk.  This poor managerial culture will need improvement.

Operations

Marshall Motors sells about 90,000 cars per year (£2bn) from 84 dealerships (106 franchises) in 27 counties across England.  About one-half of those cars are new and the rest are used.  It also provides after-sales service (maintenance, repairs, MOTs etc) amounting to £246m.

The 23 brands it sells range from Mercedes to Skoda and so it has a good degree of diversification both in terms of product and geography.

Earnings and dividends

The earnings numbers are difficult to understand because the company produces different types of earnings per share. First, there is EPS basic from those operations that are continuing.  These are the reported accounting numbers, with the profits made by selling businesses excluded.  The company sold its Leasing business in 2017 for a gain of £39.8m after tax, and sells off other, smaller, businesses from time to time.

There is EPS “underlying”.  This is after adjustments to the IFRS reported number. Such adjustment is to some extent at the managers discretion.  The big years for these adjustments were in 2017 and 2018.

In 2017 a provision of £6.8m was inserted because the directors expected that the closure of 6 dealerships would lead to exceptional losses.  They concluded this was non-underlying cost, and so added the amount back to the reported profits of 2017 to arrive at the underlying numbers.

However, it turned out that the losses were not that bad, and so in 2018 there was positive exceptional item of release of the provision amounting to £3.3m.

The only other non-underlying item in 2017 was a £6m payment to eliminate any obligation under the executive pension plan.

Thus, when looking at the EPS underlying numbers we have to make a judgement on whether (a) the costs of closing branches is normal and should be taken on the chin in an EPS calculation, and (b) the cost of a pension payoff is non-underlying.

Perhaps the truth lies somewhere in the middle between the Basic EPS and the Underlying EPS?

As for 2018, there was another “non-underlying” item of £9.3m impairment of goodwill for previous acquisitions (when they used shareholders money!), and £0.9m due to closure and restructuring costs.

Again, there is a question mark over whether all these are truly non-underlying, or whether they are normal events for a business of this kind.

A further complication comes from the pre-2015 company having a much small number of shares. This results in the EPS numbers for 2012-14 looking very large in their raw form, so I’ve adjusted them, allowing for the 2015 share consolidation and division.

Current market capitalisation £1.52 x 78m shares = £119m

Year-end Dec 2018   2017   2016   2015   2014   2013   2012
EPS Basic, p 17.9 12.3 23.0 19.7 19.7 15.3 6.6
EPS underlying 27.4 26.9 26.2 20.5 19.7 15.3 6.6
EPS underlying continuing businesses only 27.4 30.8 26.2 20.5 19.7 15.3 6.6
EPS Basic continuing & discontinued 18.7 63.8
Dividend, p 8.54 6.4
Revenue, £m 2,187 2,232
Profit BT underlying, £m 25.7 25.4

Taking the lowest

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