|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|
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.
|Entry||01/14/2018 04:17 AM|
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.
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)?
|Entry||01/14/2018 05:49 AM|
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?
|Entry||01/14/2018 02:09 PM|
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?
|Subject||Re: Compelling valuation|
|Entry||01/15/2018 12:36 PM|
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.
|Entry||01/18/2018 12:55 PM|
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.
|Subject||Re: Cambria vs. Peers|
|Entry||06/20/2018 05:43 PM|
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.