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Marshall Motor (LSE:MMH) has an impressive profits record, and its shares are modestly priced relative to average earnings per share over the years. Even taking the lowest estimate of profit, the “basic” EPS, the average over the last seven years is 16.36p, giving a cyclically adjusted price earnings ratio of 150p/16.36p = 9.2.
Dividend yield is an impressive 8.54p/150p = 5.7%; and the latest interim report announced another rise in the dividend. Market capitalisation is £1.50 x 78m shares = £117m, not much more than it paid for an acquisition a couple of years ago.
Mr Market often places companies on low price earnings ratios and high dividend yields when he anticipates a worse future, or fears high risk due to the business environment (e.g. macroeconomic state or industry decline) or due to high levels of debt and other threats to financial stability.
The purpose of today’s newsletter is to look at the financial structure and cash flows of the firm (macroeconomic or industry economics is currently tricky because of the political uncertainty, but other newsletters in this series might help make judgements on these).
The balance sheet
I exclude from the table the value placed in the official BS for intangible assets (mostly goodwill after acquisitions and franchise agreements). I also exclude plant and equipment, and deferred tax. In other words, I take a cautious approach and assume these items have zero value.
| £m | June 2019 | Dec 2018 | Dec 2017 | Dec 2016 | Dec 2015 | |||||
| Inventories | 376 | 384 | 401 | 380 | 241 | |||||
| Receivables | 113 | 80 | 92 | 95 | 43 | |||||
| Cash | 12 | 1 | 5 | 0 | 24 | |||||
| Assets held for sale | 1 | 1 | 1 | – | – | |||||
| CURRENT ASSETS | 502 | 466 | 499 | 475 | 307 | |||||
| Investment property | 3 | 3 | 3 | 3 | 2 | |||||
| Freehold & Long lease property | 124 | 125 | 116 | 99 | 28 | |||||
| CURRENT ASSETS & PROPERTY | 629 | 594 | 618 | 577 | 337 | |||||
| LIABILITIES | ||||||||||
| Vehicle funding | -361 | -371 | -381 | -365 | -186 | |||||
| Payables (& consignments) | -178 | -129 | -151 | -140 | -82 | |||||
| Bank & other debt | -6 | -6 | -7 | -119 | -51 | |||||
| Other liabilities | -25 | -30 | -36 | -32 | -9 | |||||
| NCAV & Property | 59 | 58 | 43 | -79 | 9 | |||||
| Net cash (debt) | 5.8 | (5.1) | (2.2) | (119) | (27) |
(NCAV = net current asset value. For 2019 I’ve ignored the BS impact of IFRS 16 which adds operating lease liabilities of £77m and corresponding Right-of-use assets of £83m to the BS.)
Comment on the balance sheet
The marked improvement over the years of net current asset value plus property from -£79m to +£59m gives some underpinning to the market capitalisation.
Whereas net debt was over £100m in 2016 following the purchase of Ridgeway, it has fallen to near zero after the sale of the Leasing business in 2017.
This type of conventional debt, however, is not the whole story because Marshall borrows from various other lenders under the category of “vehicle financing”. New and used car inventories are financed for 90 days by lenders including the captive finance companies associated with “the brand Partners”, i.e. the major car producers. Marshall is normally required to repay the amounts outstanding on the earlier of the sale of vehicles or the stated maturity date. Interest is based on LIBOR or similar.
Note that the amount of vehicle finance almost matches the inventories of cars Marshall displays at its dealerships. This may help explain why senior managers impose a “very strict” 56-day stock policy, encouraging focus on throughput and stock turn.
It’s intriguing that Marshalls do not include the vehicle financing amounts in the debt cash/debt figure. Perhaps they regard it as asset-based finance which uses the stock of cars as collateral and therefore is not to be lumped in with bank debt.
We might want to take a stricter view and classify it as debt. On the other hand, if the company can keep stock moving through the organisation at its historic average of under two months is it really like a normal debt burden, with covenants and other restrictions and dangers?
At least one bulletin board writer is worried by the vehicle finance: “I guess it’s the high level of short term credit that MHH carries that keeps the share price down? A high turnover, thin margin model that might see the holding value of the stock decline if rates were to rise. Which I suppose would see the creditors get nervous…it seems well run, but I’m not going to be tempted.”
If sales did decline significantly, could Marshall cope with a possible build-up of inventories? Presumably the finance suppliers would be content to raise the amount lent so long as assets, i.e. cars were there to back it and there was a prospect of good cash flow generation over the medium term.
A positive thing: the interest burden does not seem all that onerous. The total interest paid in 2018 on stock financing was £5.4m, the same as in 2017. In the half year to 30th June interest was £3m. Even if these numbers doubled it would not be a problem for a company with high positive cash flow year after year.
But, we have to acknowledge, in a severe recession cash flow maybe insufficient to satisfy lenders. This has to be a risk factor we accept.
Marshall also borrows from a bank during some parts of each year through a revolving underwriting facility. The total interest burden of this in 2018 was £1m (in 2017, £2.1m). In the half year to 30th June the interest was £0.5m.
The facility allows borrowing up to £120m. But at yearends the amount drawn down is usually zero. However, there is evidence of tens of millions drawn down and repaid during the year.
The company also has mortgage obligations amounting to £6.3m in 2018 and £7.1m in 2017
Cash flow
Clearly, a crucial factor in judging sustainability of the debt and general
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