If you Follow me on Twitter or look at the Feed on my Home Page (there is also one on WheelieDealer2), then you may have seen that after an initial hiccup I managed to buy a load more Cambria Automobiles (CAMB) at 48.45p this morning. I already had about 2% of my overall Portfolio Value in it and I added another 0.5% roughly.
The trigger for my buy was a totally storming set of Preliminary Full Year Results - as I pointed out on Twitter, it is almost faultless, and it is very unusual to see a Statement this good. So, imagine my surprise when the shares had hardly budged after about 45 minutes of trading - I decided this was crazy and it would be very rude not to take advantage and top-up.
Initially I tried to buy via a Spreadbet with igIndex - but unfortunately they were not enabling me to buy a new position - you could only Close an existing position - so I was temporarily stumped.
It then hit me that I could sell something in my ISA of Normal Shares and use the Cash freed up to buy more CAMB. However, there is nothing I wanted to Sell so I just bought it back as a Spreadbet - I chose some AA. Shares to ’swap’ as these are very liquid and the Bid/Offer Spread is quite tight so this limited Trading Costs a little. Because I like AA. an awful lot (if you read my previous Blog on AA. you will know this) I actually bought a little bit more on the Spreadbet than the equivalent value of normal shares that I sold in my ISA.
Remember, Spreadbets and Leverage are very dangerous - don’t try this at home !!
Another advantage of having AA. as a Spreadbet (rather than CAMB which I couldn’t do anyway) is that it has a lower Margin Requirement (i.e. the Deposit I have to put down is smaller than it would have been for CAMB). In addition, AA. will most likely be less volatile - so it will be easier to manage the Leverage (CAMB has a Market Cap around £48m ish so it is at the small end of things).
Sometimes you have to be flexible in your thinking not just with regard to your Stock Buy and Sell decisions but, also with how you husband your Capital’s firepower.
I was going to do a quick and short Blog but as I started thinking about it and looking into some minor details I decided that this was such a great Company that it is only right to do it proper justice.
Please forgive me for being lazy - I have copied this directly from the FY Results Announcement today - it seems to say all and a little more of what I would want to say - no point in me wasting analysis time when this has been done well already - please forgive me…..
Website - www.cambriaautomobilesplc.com
“Cambria Automobiles ("Cambria") was established in March 2006 with the aim of creating a balanced independent UK motor retail group through a self funded "buy and build" strategy, focused on turnaround opportunities.
Working in close cooperation with its manufacturer partners, the Group has built a balanced portfolio of 28 luxury, premium and volume dealerships, representing 45 franchises and 18 brands, with geographical representation spanning from the North West to the South East in Kent and South West in Exeter. These businesses are autonomous and trade under local brand names, including, Dees, Doves, Grange, Invicta, Motorparks and Pure Triumph.
Cambria's brand portfolio currently comprises Abarth, Alfa Romeo, Aston Martin, Citroen, Dacia, Ford, Fiat, Honda, Jaguar, Jeep, Land Rover, Mazda, Nissan, Renault, Seat, Triumph, Vauxhall and Volvo.
The management's success in turning around under-performing dealerships has allowed Cambria to build a strong balance sheet. As a result, the Group is in a position to acquire valuable premium operations, like the recently acquired Jaguar Land Rover business in Barnet, which are immediately earnings enhancing and directly in line with the Group's strategy to further enhance the brand portfolio.
The Group's medium term ambition is to create a £1 billion turnover business producing attractive returns on both capital and equity invested.”
Worth stressing that the acquired Dealerships are managed in an Autonomous manner - and retain their own Local Branding.
Car Retail Industry Factors
This is an industry where I have very good knowledge - I used to work as a Salesman selling Motorcycles at multi-franchise Dealerships in Exeter and then around London with Motorcycle City who were the No.1 Motorbike Retailer in the UK at the time.
The Bike industry is very similar to the car industry - in fact, many Bike Dealers are owned by Car Dealerships and there is a small bit of vice versa. If you read the CAMB overview, you will note they have a Triumph Bike franchise in their stable.
There are currently some powerful ‘Big Themes’ operating in the Motor Trade:
- Traditionally Garage Groups were small family run Local businesses with maybe 2 or 3 sites at the most. They were run to a large extent as cash cows and growth was not particularly an ambition - the owners made a good living and enjoyed what they did. It was very much an enthusiast’s business - often with the Sites passed down through family generations. As with so many other industries (blame Regulation and governments favouring Big Business), the trend now is for these Family run operations to be bought up by the Big Boys. I think I mentioned the same trend with regard to Pets Shops in my Pets at Home (PETS) Blog. Because they were mainly Cash Cows before, these businesses can be bought at very Low Prices and improved just by following some simple Good Practice and turned around to make very profitable outlets. This is what CAMB does.
- Europe is an Economic Disaster Area…….”why is this relevant?” you ask…well, once you get your head around it, the answer is obvious and very powerful for all Car Retailers in the UK. Major European Car makers (think VW, Fiat, Ford, Vauxhall, Renault, Citroen, Peugeot, BMW etc.) need to keep their factories busy and pumping out Cars - but, because of Europe’s mess, there is only one market where most of these Cars can go - the UK. But the UK only has so much demand, so the Manufacturers are subsidising the Cars to get them shifted. This means that Car Groups like Vertu (VTU), Pendragon (PDG), Inchcape (INCH), Lookers (LOOK) and of course CAMB, are having an easy time selling New Cars. Firstly, the Customer (or ‘Guest’ as CAMB calls them - oh dear) gets a Discount from the Manufacturer (usually in the form of Extra Free Deposit on a PCP deal) and they often get another Discount from the Dealer where the Dealer sacrifices a bit of their Margin to seal the deal - often this is ‘free’ stuff like Car Mats, Metallic Paint upgrade, Heated Seats etc. - the Customer sees these as a valuable add on but they cost the Dealer a lot less. For example, say the Mats are priced at £90 to the Customer (and the Customer sees their ‘value’ as £90), the Dealer only pays £40 for them.
- Used Cars are holding their price very well - the reason for this is because during the Credit Crunch period around 2008/2009 ish, the number of New Cars sold collapsed. This means there is now a shortage of Used Cars around this age - supply and demand. This also helps Dealers up sell the customer to a New Motor.
- There is a trend towards PCP deals (Personal Contract Purchase), whereby the Customer has a chunky initial outlay (often they Part Exchange a previous Car) and then very low Monthly Payments for usually around 36 months. At the end of the Term, the Customer has several choices - Pay the big Outstanding amount in cash, Pay the Outstanding amount via a Loan, hand the Car back and walk away or hand the Car back and start a New PCP deal on another Brand New Car. It is pretty obvious to see why Customers like these deals - the low repayments is the key. The beauty for the Dealers is that people on PCP plans tend to buy Servicing Contracts with them (keeping Workshops busy) and it means improved predictability and control over the Customer Sale Cycle for replacement cars. CAMB make exactly this point in today’s statement.
It is obvious that the CEO is the driving force (bad pun) behind CAMB -
“Mark Lavery, Chief Executive Officer
Mark has over 20 years automotive retail experience and is considered to be a highly experienced executive from the automotive dealership sector. He was the Group Operations Director of Hartwell PLC from 2001 to 2003, an Operations Board Director of Reg Vardy PLC from 2003 to 2004 and became the founder and CEO of Cambria in 2006.”
(I copied this from the CAMB website and the Major Shareholders below).
Major Shareholders (3% or over of Ordinary Shares)
Mark and Nicola Lavery:
- 40,000,000 shares
Burt Concert Party:
- 4,303,272 shares
Hargreave Hale Limited:
- 6,012,500 shares
Henderson Global Investors Limited:
- 5,476,070 shares
- 5,103,114 shares
Aberdeen Holdings Limited:
- 3,160,000 shares
NFU Mutual Insurance Society Limited:
- 3,000,000 shares
Clearly Mark Lavery has a lot of ‘Skin in the Game‘.
From the Announcement today, it looks like CAMB has debt of £4.6m, and Assets of £28.3m - so no great problems here. Cashflow looks fine and the Company is clearly focussed on using Cash generated internally to fund its “Buy and Build” strategy. They have raised the Dividend 20% for the Year and say they intend to grow the Divvy in line with Earnings growth - but they will not sacrifice the Acquisition Strategy for the sake of a higher divvy. This is reasonable and the Divvy growth shows they are confident in the future and generating the cash to pay it.
I note the comments about funding available for Acquisitions - they have resources of £19.3m when you add the Cash they have and undrawn Debt Facilities - this is about 40% of their Market Cap - so if this was deployed, it could certainly do a power of good to the share price.
There is no Defined Benefit Pension and seems to be no issues on this subject.
They have £35.7m of Freehold and Long Leasehold Property - this gives good backing.
The most obvious risk is Economic Slowdown in the UK. This is a very real possibility and CAMB is in a highly cyclical industry. However, I would argue that nearly all stocks have the same risk - if the UK goes into recession, then it will only be Tobacco stocks, maybe pharma and Dignity (DTY) that will hold up - and even they will probably fall a bit.
I heard that one of the speakers at the Mello Conference said CAMB had a 2 year window where market conditions will be favourable. This may, or may not, be correct. Who can tell? What I do know is that CAMB managed to negotiate the Credit Crunch fairly well (and that was a very tough time for Car Dealers) and I suspect the Growth from its Acquisition Strategy will outweigh the drag of Economic Slowdown. Such conditions may actually help CAMB - it means they can cherry pick Acquisitions at better prices.
There is acquisition risk - a possibility that they buy a duff dealership. This is mitigated by their success so far and they have clearly shown they know what they are doing.
Another acquisition risk is that CAMB itself may get taken over - I think this is extremely likely. The downside will be that it will probably go for less than I think its true value should be but the upside is that I get a good gain very fast. A high class problem to have really.
Competition from other Car Retail groups could be a factor - but I suspect this is largely mitigated by the geographic spread across the UK. They might face localised competition but on a UK wide basis they will spread this risk.
The next risk is more a stock risk than a business risk. CAMB is AIM listed and has a Market Cap around £48m - so it is small in Stockmarket terms. This means it will probably be volatile and the Bid/Offer spread can be wide.
It is one where anyone buying should not put a huge part of their Portfolio in.
As I mentioned at the start of this epic (Tolstoy eat your heart out !!), the Full Year results were superb. They also say that in the months since the end of the FY, they are trading ahead of their plans and clearly they are doing well.
I note a comment that they wish to create a “£1bn Turnover Business in the Medium Term” - the FY Revenue was £450m so they clearly want the company to double in size. There is a good chance that with more efficiency in the Dealerships they acquire, profit could grow much faster - so this could drive the Share Price up hugely over a period of, say, 5 years.
You can read the RNS yourselves, but here are some highlights:
- Revenue up 14%
- Profit Before Tax (PBT) up 33%
- Earnings Per Share (EPS) up 19%
- Divvy up 20% (yes, yes, I know I already said that before. But I like it. So I wanted to hear it again.)
It is worth noting that it seems like the EPS figure reported today is slightly light on the Forecasts I can see in ShareScope - I am relaxed about this but it is something readers may wish to see more detail on. The reported figure was 4.15p against a Forecast of 4.20p - it seems a pretty tiny difference and may be explained by Exceptional Items or something.
I will just work with 2015 and 2016 forecasts - although it seems likely these may get upgraded in light of the positive Outlook Statements today.
ShareScope has Forecast EPS of 5.00p for 2015 and 5.40p for 2016.
At the price I paid of roughly 49p (I have rounded up), the forward P/E ratios are:
2015 - 9.8
2016 - 9.1
For the quality of this business, that seems a pretty low valuation.
The Divvy yield Forecasts are:
2015 - 1.46%
2016 - 1.46%
Note the Forecasts are for 0.7p of Divvy each year - I suspect this may be higher in 2016.
With growth in Profits around 20% ish, you get a PEG (Price/Earnings Ratio / Growth) of about 0.5 - remember, anything below 1.0 is usually seen as cheap. Put this on a PEG of 1.0 and the Share Price has to double.
Bearing in mind this is a cyclical Industry, I guess a fair and realistic Target should be based on a P/E of 15. On this basis, you get a Target of 75p (5p x 15) based on 5p of EPS in 2015 - this seems Conservative.
If you want to be more Bullish, then a P/E of 15 would give a Target of 81p (5.4p x 15) on 5.4p of EPS for 2016.
In time, with patience, I am sure this could hit 100p - but it may take a few years. I am happy to wait. A bit of P/E expansion (in other words give it a higher P/E because it proves itself a credible operator over many years) and some Acquisitions that are in addition to Forecasts, and 100p might be achievable in a couple of years. Note they state today that they are looking for “Immediately Earnings Enhancing Acquisitions“………
Here are some P/E ratios for similar firms for 2016 - obviously they are larger so could command higher P/Es but they won’t have the Acquisitive Growth that CAMB is likely to achieve:
- VTU - 10.9
- LOOK - 10.2
- INCH 13.9 (more of a Global Operator)
- PDG - 9.5
Well, compared to these, CAMB looks priced about right. Maybe the Market is taking a dim view of Car Retailers. I doubt these larger Groups can achieve the growth rate of CAMB but readers will have to make their own minds up. It’s worth noting that in today’s Report they said they were outperforming the wider New Car market:
“Growth in new vehicle sales of 16.7% - 6.1% ahead of the market at 10.6%”.
On a Medium Term view, the chart looks to be in a bit of a Downtrend, so I may be under a bit of pressure here for a while. However, on a Short Term view it looks very positive, with the RSI, MACD and the 13 day and 21 day Exponential Moving Averages (EMAs) looking good.
Conclusion / Key Points
One nice thing about this sort of business is that it is quite simple to understand - and we have all bought Cars at some point in our lives.
The standout things for me are:
- Acquisition Strategy and Firepower to perform it.
- Favourable Market dynamics.
- Consolidation Trend in Car Retailing industry.
- Robust Balance Sheet.
- Reasonable valuation - especially cheap on a PEG basis.
- Mark Lavery top geezer and considerable Skin in the Game.
- Seems “off the Radar” and high chance it will get taken over.
On my conservative Target of 75p, I am looking at 56% upside.
You pays your money and you takes your choice (or your Brand Spanking New Shiny Motor in this case).
'Til we meet again………