2018 | 2019 | ||||||
Price: | 0.58 | EPS | 0.075 | 0.079 | |||
Shares Out. (in M): | 100 | P/E | 7.7 | 7.3 | |||
Market Cap (in $M): | 58 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | -6 | EBIT | 10 | 11 | |||
TEV (in $M): | 52 | TEV/EBIT | 5 | 4.8 |
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1) Valuation converges with historical multiples and peers in the US. 2) Many of their dealerships have not reached their full operational potential providing latent growth in earnings. 3) The six capital projects underway have yet to contribute to earnings and will be complete within the next few years. 4) Continued investment of excess cash flows at high returns. 5) Eventual sale to a larger dealership group.
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30 | |
This microcap getting the attention of the FT. It's that egregious. https://www.ft.com/content/0075c78a-620d-4f91-94bf-7fa01153a7fe | |
29 | |
I've been long all of Cambria, Gamesys and Augean so on one hand I've been extraordinarily lucky in the last 6 months, but in each case I've felt a little underwhelmed at the acquisition consideration (Augean and Cambria especially) and surprised or even dismayed at how seemingly useless the UK instos were in pushing the target's BOD harder to maximize competitive tension / get a better price. Why is the UK insto culture seemingly so weak? | |
26 | |
The whole thing is misleading and riddled with errors. I don't have my calculator handy, but I don't think 1.83% + 3.17% = 1.85%. Out attorneys found a number of faulty citations that point to the wrong places etc. Thanks, a little luck can't hurt. Stay tuned. | |
24 | |
This is an interesting question, and a form of Soros' reflexivity. If the trading price of a business is low enough for long enough, does that affect it's value in a transaction? I certainly hadn't previously had "stock is too cheap and has been for too long" on my list of risk factors, but maybe there's some truth to that. As for why it was so cheap for so long, the industry has been a mess. Cambria's peers have not covered themselves in glory (bad M&A, accounting scandals etc) and that's weighed on the sector. And the UK auto market has been weak for years. There was a time when US auto dealers also traded for similar valuations, and now they're market darlings trading on 2025 growth targets. It's also just plainly true that the lack of liquity was a barrier to larger funds buying a position. But at the same time, lack of liquidity can sometimes mean a higher valuation for companies that are executing well? Bottom line is that the offer grossly undervalues Cambria, and Mark is trying to unlock the value only for himself rather than for the benefit of all shareholders. We'll see if he is succesful. To again quote the great Nick Sleep: Our view is that the discount that the shares trade at in the market is an asset to be harvested for the benefit of all shareholders through share repurchase. But human nature being as it is, insiders will be incented by the low valuation to buy the shares for themselves. | |
23 | |
I for one couldn't really buy UK listed company via IBKR efficiently. It was always a pain in the butt. It was literally that simple for me. | |
21 | |
Honestly, I've been investing long enough to know that when you find out the management want to screw you, it's just not worth my time anymore. Cambria is one of my friends' favorite names and they have pitched me mutliple times. It is too small and illiquid for people to care. Now we are getting into the arbs game and squeeze outs rather than focusing on the quality of the business. In small cap investing, there is escape velocity or you're perpetually trapped. I'll bet some of my friends are like "darn it, I got to put my arb hat on now. Probably best to just sell and move on." No position. But it is incredible to see a "pound the table name" in the past 4-5 years get taken out like this. Sorry to rant. Just a bit jaded and got some gray hair now. | |
20 | |
The 66% (65.8% to be precise) includes the LOI sharesholders so those are not in addition. I do not think it's a done deal. Many shareholders were under the impression that they were forced to tender or be stuck with delisted shares. This is not the case as outlined in my prior post. This misconception is receding. I think it's going to close, but outside of the 65.8% support Mark has received entirely from UK shareholders, it's hard to imagine who would tender at this price unless they felt forced to do so (which again they are not). Notably, there are some other UK institutional shareholders who did not give irrevocables or LOIs even though they were clearly encouraged to do so. I think it's going to be close. You're right, it is gross. And you are not wrong about the abuse. | |
17 | |
“The Weetabix offer is only one of many privatisations of cheap, small and mid capitalisation businesses in the UK. Institutional shareholders have abandoned these firms in favor of mega-caps, and the shareholder base is left dominated by one or two inside interests and a tail of small holders. Our view is that the discount that the shares trade at in the market is an asset to be harvested for the benefit of all shareholders through share repurchase. But human nature being as it is, insiders will be incented by the low valuation to buy the shares for themselves. A Scheme of Arrangement is the most ruthless method of asserting one party’s will over a fragmented and non-professional shareholder base, and coupled with irrevocable acceptances allows takeover offers to be presented as a fait accompli to shareholders. Please note: bad practice spreads. Despite this, and the almost daily occurrence of privatization proposals in the UK, there has been almost no criticism by shareholders, the authorities or in the media. In no other sphere of capitalism can your property be seized in exchange for cents on the dollar (except compulsory purchase on the grounds of national interest). But fund managers, who in their private capacity would be insulted if someone offered less than their house was worth, happily sell shares in their professional capacity at discounted prices to smart buyers. And no one cries foul.” - Nicholas Sleep, December 2003 Nomad Letter to Shareholders Well, to all you Mark Twain Fans out there, here we are again with history rhyming in the form of Cambria Automobiles plc [CAMB on the AIM Exchange]. THIS IS A CALL OUT TO CURRENT CAMBRIA SHAREHOLERS AND SWASHBUCKLING NEW POTENTIAL HOLDERS LOOKING FOR SOME FUN AND ADVENTURE! The setup: CEO Mark Lavery, owner of 40% of the shares of Cambria Automobiles, is trying to take the Company private for £82.5 million. He is using a coercive maneuver to try to scare current holders into tendering their shares. His offer is conditional on receiving 75% of the shares outstanding (including his own), at which point he will file to delist the Company and leave remaining holders with unlisted and illiquid shares. But all is not as it seems! There is no real knife on the throats of shareholders. Nobody need tender now. If he gets his 75% we will all have a 2-week window to then tender our shares and avoid being trapped in an unlisted security. Don’t believe me? See for yourself on page 48 of the Offer Document which states: If the Offer becomes unconditional as to acceptances, it will remain open for acceptance for no fewer than 14 days from the date on which it would otherwise have expired. http://www.cambriaautomobilesplc.com/resources/camb_offer_final.pdf Why in the world would anyone sell this Company back to Mr. Lavery for £82.5 million? Let’s look at what we have: First is the owned freehold property which had a book value of £82 million in February. Sure there was £20 million of mortgages against that, but Cambria also had £14 mil of cash, for a net debt balance of only £6 million. In the past CFO James Mullins has suggested the market value of this property exceeds £100 million. Perhaps, then, it is not surprising that the go-private playbook appears to include a plan to form a REIT to monetize these assets. Internally, Cambria uses a 6% capital charge on these assets implying £4.9 mil of implied rents. A query on Factset turns up 89 listed REITS in the UK across the London, PLUS and Unlisted exchanges. The average and median yields are 2.8%. If Cambria moved its real estate into a REIT structure and diverted £4.9 mil to rent, and we impute 10% overhead costs on what is essentially a shell company, then the implied value at a 2.8% yield would be £157.5 million. Of course, the ultimate value of the REIT would depend on the rents that Cambria would want to pay…they could easily decide to pay more than £4.9 million to maximize the value of the real estate part of the Company…especially when earnings multiples for auto dealerships remain so low. We invested in Cambria because we viewed it as the best managed UK auto dealership as evidenced by its best-in-class return on equity, margins, and capital allocation record. Over the 12 months through February 2021, Cambria reported 11p of EPS. At the £82.5p offer, Lavery is paying us just 8.3x earnings! And that’s with zero value assigned to the real estate! But wait, there’s more…these earnings came during lockdown and ahead of a massive profits surge for the whole UK auto dealer industry. While there is limited supply of new automobiles, owing to the semiconductor shortage, used cars are flying off the shelves at inflated prices and strong margins. Consider the following headlines from Automotive Management Online in the UK (https://www.am-online.com/): Used car sales rose 108.6% to record levels in Q2 Marshall resumes dividend payments after reporting record H1 Marshall further upgrades record 2021 profit forecast Group 1 boss predicts release of several years’ pent-up car retail demand Positive car buyer demand prompts 20% Pendragon profit upgrade for 2021 Inchcape reports near 15-fold year-on-year profit increase in H1 2021 Lookers turnaround to deliver £50m pre-tax profit in H1 2021 Vertu Motors' 2021 pre-tax profit forecast upgraded by 60% in a month Which begs the question: how much money did Cambria earn in the second half of fiscal 2021? We may never find out. The September 3rd due date for share tenders will likely come before Cambria reports these results. If we double the first half results, that would be 16p per share, in which case Lavery is buying Cambria for just 5.2x earnings. But I bet Cambria earned substantially more profits in the second half. Given these figures, the business trading at 5-8x earnings or possibly less, without factoring in real estate that is potentially worth twice the current offer price, it would be crazy to tender your shares. And there’s no need to. If Lavery gets to his 75% we can always tender later. And if he doesn’t, we get to participate in Mark’s desire to maximize value after 15 years of great business performance but little reward. One last thing: Cambria last traded at 80.5p which is 2p below the offer price. For anyone out there who would like to participate in value creation at Cambria, buying shares here is a no-brainer. If Mark succeeds in stealing the Company, you can tender your shares later and make 2.5p risk free. And if he doesn’t, you get all the upside from here.
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16 | |
Management is exploring an offer for the Company at £80. This is slighly less than just the owned real estate valued at book. If they hit their informal £20m pretax target (very achievable in my opinion), Cambria should be worth more than £160 to a third party. Frankly I'm dissapointed in the offer. | |
15 | |
Cambria's business is performing well despite the tough economic environment.
Our high level view of auto retail is that franchise dealers that represent high-luxury brands are better positioned going forward than volume franchise dealers. There are too many volume franchise dealerships in the UK. Furthermore, volume franchise dealerships are also more at risk of being disrupted by online auto retailers such as Motorpoint and Cazoo.
We spent 3 weeks in the UK a few years ago and during that trip we visited nearly all of Cambria's dealerships. As we've continued to study Cambria, the more we appreciate how well run this business is. CEO Mark Lavery owns 40% of the shares and in our view is one of the best operators and capital allocators in the industry. His track record over time demonstrates this.
Mark Lavery has made some outstanding acquisitions during periods of distress. Cambria has a strong balance sheet which gives them the ability to be opportunistic during this tumultuous environment. Earlier this year Cambria purchased an Aston Martin and Rolls Royce franchise from a bankrupt operator. These two dealerships were purchased for just the value of the property and Cambria paid no premium for the valuable high-luxury franchises.
We closely follow Mike Allen of Zeus Capital, which is one of the sell side firms that covers Cambria Automobiles. Mike Allen expects Cambria's FY 2021 results to be within 20% of last year's level (Cambria earned ~£10m of net income in FY 2019). He tends to be conservative with his projections.
Cambria's market cap is currently £50m and Mike Allen is forecasting £8m in FY 2021 net income for a P/E of just 6.25x on trough earnings. Furthermore, Cambria owns all their properties which are worth more than what they are marked on the balance sheet for. Cambria's properties are conservatively worth £80m - £90m which is substantially more than the current market cap. The shares are trading for a price that is far too cheap for a quality high-luxury franchise with an owner operator management team. Any way you slice it, Cambria shares are very undervalued at this price.
Within 5-7 years we expect earnings to double to £20m driven by: (i) Maturity of newly opened high-luxury dealerships, (ii) Growth of their software business, and (iii) Opportunistic acquisitions and continued new franchise awards. We expect EPS of £0.20 within 5-7 years and a fair value of over £2.00 (300% upside). | |
13 | |
Hi Levcap,
Thank you for the comment/ question. I continue to own Cambria and I believe the stock remains very undervalued at less than 7x trailing earnings. This is far too cheap for a quality business that has an excellent track record.
I agree with you, there is no question the new Aston Martin DBX is going to be a meaningful contributor for Cambria. I think all of your assumptions make sense.
Mark Lavery has said publicly that the DBX is likely to double sales for Aston Martin. "The Urus doubled Lamborghini sales globally and the DBX will double our sales for Aston Martin. I have no doubt.” - Mark Lavery
Source: Also, Aston Martin appears to be on better financial footing after the bailout by Lawrence Stroll. This is good news for Cambria and other dealers that represent the brand:
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11 | |
MPK391,
Thanks for the question.
Cambria's 2019 fiscal year ended on August 31st and they will report full year earnings on November 20th. On September 4th Cambria released an 11 month business update and from that we can get a good sense of what earnings will be for the 2019 fiscal year. Zeus Capital (Cambria's in house broker) has them earning 9.5 pence per share in underlying after tax earnings for 2019. Based on Zeus's estimate, Cambria is trading for a trailing P/E of 5.8x based on a share price of 55 pence.
For the current fiscal year (fiscal 2020) I feel quite confident earnings will grow unless there is a meaningful decline in the UK economy. Cambria's new Hatfield location (Jaguar, Land Rover, Aston Martin and McLaren) just opened in May and is their largest single dealership investment to date. Hatfield will contribute incrementally to profits over the course of the year and beyond until it reaches maturity. Cambria will also have a full year contribution from the new Lamborghini and Bentley dealership in Tunbridge Wells. Cambria has quite a few additional dealerships that have not yet reached maturity. New dealerships generally take 5 years to reach full maturity. 12 of Cambria's 42 franchises are less than 2 years old and as those dealerships continue to mature they will continue to contribute incrementally earnings.
I would expect another meaningful earnings improvement in the current fiscal year absent any Brexit caused downturn in the UK. If the UK economy holds up, I would not be surprised to see earnings grow by a double digit percentage resulting in a P/E in the 5x range for the current fiscal year.
Turning to your question on lease terms and overall UK auto sales - I haven't seen any evidence that things are getting frothy either in the financing arrangements or overall UK auto sales. But I welcome any data, push back, or counter arguments from those on the VIC board. UK automobile registrations have already come down from a peak of 2.69 million in 2016 to an estimated 2.31 million for the current year. The current level of automobile registrations are not that far above where they bottomed in 2011 (1.95 million units). New car sales contribute just 27% of Cambria's gross profit. Aftersales (parts and service) is the largest contributor to profits (40% of gross profits) and is not cyclical. Despite the tough economic environment in the UK, Cambria's earnings have held up well.
Cambria's portfolio of franchises is increasingly skewing towards high luxury (Lamborghini, Bentley, Jaguar Land Rover, Aston Martin and McLaren). In conversations I've had with Cambria management, their focus on expanding into high luxury brands is in part because they are attracted to the more stable profitability of high luxury dealerships compared to mass market brands.
I feel comfortable that at this price there is a large margin of safety and once the Brexit nonsense passes, I believe Cambria and the UK auto dealership industry as a whole will command a more reasonable valuation.
Thanks again for the question and I hope my answer was helpful. | |
10 | |
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9 | |
for what period is that 5x p/e? I recognize there is a lot to like in this story. I've also heard (from UK folks when I told them I thought some of their auto dealer stocks seemed cheap) that lease terms have been really loose for some time and that the UK might see a downturn in auto sales if things revert to normal. Any comments on that? Thanks | |
8 | |
Cambria Automobiles released a business update the other day covering the 11th month period ending July 31st 2019. The business is doing outstanding. Zeus Capital (the most prominent UK sell side firm covering the auto retailing space) forecasts earnings will grow by 22% this year. This is quite remarkable given the economic headwinds in the UK. Cambria is far outperforming peers. For example, Pendragon (the largest UK auto retailer) is projected to swing to a meaningful earnings loss over the period. Cambria now trades at approximately 5 times after tax earnings. Additionally, I anticipate Cambria's earnings will grow significantly over the coming years as their new high luxury dealerships begin to produce meaningful profits. I continue to have confidence that Cambria will be worth over 200 pence a share in the medium term compared to todays price of around 57 pence.
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7 | |
Honeycreek,
Thanks for the question.
As you point out, the entire UK auto dealership sector trades at a low multiple. From discussions I've had, it seems that fears related to both the recent decline in UK auto sales as well as Brexit are contributing factors to why the sector has traded down to these multiples. I view these as short term factors and since I plan to own Cambria for 5+ years I don't worry about either.
I researched all of the public UK auto dealership groups and I like Cambria the best because of the quality and track record of management, and the conservative balance sheet. I also like their focus on luxury franchises going forward.
None of Cambria's peers come close to matching their track record. From a starting capital base of only £10.8m in 2006, Lavery has built Cambria into a business with a market cap of £62m (which I believe far understates intrinsic value). Cambria has achieved the highest ROE among peers over this period and at the same time has maintained the most conservative balance sheet.
I think some of the other auto dealership groups in the UK are also compelling. I like Vertu and own it as well. Vertu's stock is much more liquid than Cambria and larger funds who are unable to buy a meaningful amount of Cambria could take a look at them. | |
6 | |
Pure EV's do require less service and maintenance. Thanks for including the presentation from Bilia which shows service and maintenance revenue is 12% lower on the BMW i3 vs. the BMW 3 series. This shows a slightly higher number and includes data for some other vehicles as well: https://www.goultralow.
Electric cars will take a while to become a meaningful portion of new car sales. The speed of adoption is tough to predict but Bloomberg is forecasting that a decade from today a little more than 10% of new car sales will be pure EVs. There are many limiting factors to quick adoption of pure EVs. For example, the UK electrical grid is at 98% of capacity. The adoption of pure EVs will be gradual.
According to the same article, it will take until the mid-2020's for pure EVs to be cost competitive with the combustion engine: “By the mid-2020s I expect there to be a tipping point where the electric car starts to out compete the internal combustion engine. It’s the way it’s going.”
The driver of aftermarket revenue is the car parc rather than new car sales. If 10-20% of new car sales are pure EVs in 2025, that would result in a very small impact to the car parc. Only 1-2% of the car parc would shift to pure EVs every year. The point being, it takes a very long time for the car parc to change. In 2025, Bloomberg forecasts that only 2% of the car parc will be pure EVs. Even in 2035, it's 19%. Assuming these numbers are roughly right, the impact on aftermarket revenue would equal: the decrease in service revenue per vehicle (I'm using 30%) multiplied by percent of pure EVs in the car parc. In 2025, this will impact aftermarket revenue by (2% *.3) = .6% and in 2035 it will be (19% *.3) = 6%. Aftermarket is 40% of Cambria's gross margin. I should point out, the 0-6 year car parc matters much more than the total car parc for a dealer's aftermarket business (as discussed in my write-up). Since the average age of an automobile in the UK is about 7 years, the 0-6 year car parc will change about twice as fast the overall car parc.
The total number of cars on the road is growing at the same time. In 2040, Bloomberg estimates that 54% of new cars sold will be pure EVs and 33% of the car parc will be pure EVs. Obviously an estimate this far out has limited value but it helps illustrate my point that overall growth in car sales will offset some or all of this headwind. The number of vehicles on the road is growing significantly over this time and even though pure EVs take a significant amount of market share over this period, the number of cars with combustion engines is growing from 1 billion to 1.2 billion.
The assumptions related to adoption of EVs are obviously subject to a wide range of outcomes. But the point is clear, adoption of pure EVs is going to take a while and the car parc is very very slow to change. The car parc changes so slowly that it will be decades before this will have a meaningful impact on aftermarket. At the same time, the number of cars on the road keeps growing, offsetting some of this headwind. Also, in my write-up I discussed some of the tailwinds that will benefit the aftermarket side of the business. One in particular is the increasing complexity of newer cars loaded with lots of new technology. The more technology in the car, the more that can go wrong and require service. The advanced technology requires expensive diagnostic and repair equipment and this makes it tougher for the independent mechanics to compete with franchise dealers for aftermarket revenue. The barriers to entry for the independent mechanics are growing. Independent mechanics will continue to close as a result and franchise dealers will gain market share in service and maintenance. The aftermarket side of Cambria's business is growing and I believe that will continue to be the case for decades before the affect of EVs begin to impact results. I will earn my purchase price back in cash flow many times over before this is a factor.
I want to end this answer by acknowledging that although I'm quite confident in the conclusion above. If anyone with more expertise in this area feels that any of my assumptions may be off or thinks I could be wrong, I would welcome counter arguments. What could cause my conclusion on this question to be incorrect would be: the adoption of EVs comes much faster than people expect or as EV technology advances, the amount of service ends up being drastically lower in pure EVs vs a conventional car. Again, I welcome thoughts from those who have expertise in this area. | |
4 | |
Barong, Rhubard and Dutchballa,
Thanks for the questions. I have limited time today, but I will address the question on the insider sale. I will make sure to get to the other questions soon.
You referenced the sale of 100,000 shares by chairman Philip Swatman on the 4th of January. In the filling it noted that he sold the shares to partially finance a house purchase and he has no plans to sell any more shares. Since this happened just a few weeks ago, I know nothing more than what was included in the filling. I'm hoping this is nothing more than just noise, but I will bring it up when I speak to management to hear what they have to say. Here is the filling: http://www.cambriaautomobilesplc.com/resources/040118DirectorDealingPS4.pdf
Besides this transaction, there was a share sale in 2014 by director Sir Peter Burt (who has since passed away). The filling also referenced the shares were sold to build a new house. Besides these two transactions, all insider transactions since the company was originally listed have been purchases.
As I mentioned in my write-up, CEO Mark Lavery owns 40% of the outstanding shares and has never sold a single share. | |
3 | |
The thesis and valuation you point out looks extremely compelling especially with the pent up earnings you claim are there from the capex projects and the businesses sound the same as the US dealers as you point out. Is there a reason that Lavery and the board don't just take out the remainder of the float which would be a mere $30m check and keep the 4x upside you claim for themselves? Why would anyone with good information sell any stock at these levels and not be hoovering in as much as possible? There is no leverage to boot. It's very perplexing. Have you spoken to management about this or have any theories of your own? | |
2 | |
I have a couple as well. They have committed to spend half their market cap on capex. This seems like a deviation from the original strategy where they focused on acquiring underperforming dealerships and implemented better operating practices. Is this prudent? On of my concerns with new car dealers in U.K. is the OEMs are always pressuring dealers to build extravagant showrooms. It seems like Cambria has taken the bait here. Do you share this concern? What type of returns do you expect from this spend? The market appears to be saying that U.K. new car sales are above midcycle and that these companies are overearning. Looking at U.K. car sales data, this seems to be a reasonable assumption. I understand that the service side is less cyclical, but they do make plenty of gross profit selling cars (new and used) as well. Do you have a view on what midcycle SAAR is and what Cambria would earn on midcycle volune with today’s footprint? Insiders are sending mixed messages. The chairman just sold 100k shares a week ago at these levels. Do you know the story there?
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1 | |
1. Is there a risk that EVs require less costly services than fossil fueled cars because of fewer moving engine parts etc? ( I live in a countrywith very high EV penetration (Norway) and I realize that this is not the case to the same degree in the UK; but the trend is towards more EVs everywhere over time). Would be interested to hear your thoughts on this. It looks like service revenue is more than 10 percent lower judging from this BILIA SS CMD presentation for example. http://www.bilia.com/EPiUpload/COM/Kapitalmarknadsdag/Capital%20Markets%20Day%20171110_NY.pdf (slide 131). 2. Your comp set consists at least partly of some very large companies. Given the small size and limited liquidity, is a multiple in line with this average really appropriate (I realize it still looks cheap even adjusting for this), especially given the limited growth opportunity currently (you state that prices are high in the space at the moment)? |
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