Vertu seen as more favourable prospect by Canaccord, who hikes target

The UK's fifth largest motor retailer Vertu Motors was seen as a more favourable prospect by Canaccord Genuity after the AIM-quoted firm posted a rise in pre-tax profits in its most recent trading year, despite seeing a slight decrease in revenues.

Vertu's full-year pre-tax profits came in at £28.6m, bang in-line with expectations re-based by its board back in January, amid increasing pressure on new car sales and used car margins that led to a 0.9% dip in revenues.

Key to the Canadian broker's improved assessment of the company, chief executive Robert Forrester was pleased with the group's post-period performance in "all key areas" during March and April, leaving him and the board confident for the coming full year.

"This is a cautious management team, so when the outlook statement mentions that 'the prospects for the UK new car market are likely to be more favourable' and 'the outlook for used cars is strong' along with 'after-sales prospects are positive,' the market should take note," said Sanjay Vidyarthi, Canaccord's analyst.

While Vertu's year-to-date profitability was behind the previous year, Canaccord said trends were "encouraging" and that comparatives for the remainder of the year were set to ease, leading it to keep its 2019 pre-tax profit forecast of £26.6m unchanged.

At the same time as reiterating its target price on Vertu, Canaccord also chose to up its target price on the firm, saying "There are no material changes to our earnings estimates, but we raise our TP from 57p to 66p."

Yet the analyst did roll-forward its discounted cash flow forecasts and eliminated the 10% discount he had applied versus the shares' long-term price-to-earnings multiple, with the latter a reflection of the company's more positive commentary on its outlook.

"Beyond the numbers or the macro issues, the narrative makes important points on how Vertu has grown to be the sixth largest motor retailer in the UK in 11 years. A stable management team is key, but so too are strong cultural values," wrote Vidyarthi.

"We maintain our view that this is a high-quality asset and management has built solid foundations - financial, strategic and cultural - to deliver long-term earnings growth and cash generation," he added.

Vidyarthi stuck by his prior 'buy' recommendation for the shares.