Motorpoint Group Plc

Motorpoint (MOTR) has been written up twice on VIC – by JohnKimble in 2017, and by rhubarb in 2019 – and the stock has performed well since both write-ups.  With that said, I think the stock will provide many years of above-average compounding and consider MOTR a great long-term hold.  

Background

MOTR is a UK-based car retailer that specializes in “nearly new” vehicles.  Virtually all vehicles sold have been driven less than 15k miles and are less than 2 years old.  

The target market for MOTR is new car customers looking for a great deal.  MOTR’s vehicles typically sell for thousands less than new cars – on average a 35%+ discount.  This gives them an advantage over franchise lots because dealers can’t feature a barely used car at such a large discount to new cars without hurting new car sales.  Instead, used vehicles are priced higher to make the new cars look more attractive which is a win/win for the dealership – they can continue to sell new cars at a decent clip, while also ending up with higher margins on used car sales (versus pricing used cars closer to Motorpoint’s price point).  The end result of all this is that MOTR sells their vehicles at the lowest price point, and ends up taking share over time.  

Motorpoint is fine taking a lower margin because they turn over cars at 2x+ the industry average and leverage their fixed costs.  They source their cars from various fleets and rental companies which provides a constant stream of supply. As they get bigger and buy in larger increments, they become a bigger force in auction markets.  Occasionally, MOTR will buy cars directly from dealers at a huge discount (typically due to a demand issue), but this is rare.  

MOTR just opened their 13th store (in Swansea) and plans, over the medium term, to have 20 stores in the UK.   Motorpoint’s market share of total used car sales in the UK is ~1%, which I would expect to increase steadily over time.  

Growth

Motorpoint will almost certainly get to 20 stores over the next few years and at the same time I would expect ~3-4% organic growth (from previously opened stores) along the way.  The oldest stores typically hit maturity around the 7-10 year mark, which means today around 7 of the sites are at maturity and exhibiting less than 3% sales growth. The newer sites are likely going to average 5%+ organic sales growth which leads to 3-4% blended organic growth.  

On top of the organic growth, new store openings will provide a 3-6% tailwind each year, depending on how many locations they’re opening.    Sales typically start at a much lower level than mature locations and gradually rise over time – otherwise new store contribution to sales growth would be higher.  Anyway, between organic and new location sales growth, I expect at least 6%+ revenue growth over the medium term.  

With that said, arguably the most disappointing part about Motorpoint is that they’re not nearly as aggressive as I would prefer on store openings.  MOTR spends virtually nothing on CapEx – prior to this year MOTR had never spend more than ~£4mm in a single year – and has a prodigious amount of FCF to work with to grow, due to store leasing.  I think if they really pushed the pedal to the metal they could go from 13 stores today to 20 within 2.5 years but given their conservative growth strategy it will most likely take almost twice as long, with the caveat being they will have growing FCF along the way, versus much lower FCF over a 2.5 year span if they were growing faster.  Management has acknowledged, multiple times, that they have not been as aggressive as investors would like, and I do believe there is upside to the pace of store openings after 2020.  

Once they get to the 20 store count, there is opportunity beyond this level to get to around 30-40 stores.  The first 20 stores will serve the immediate area around 50-60% of the population, and then the decision will come down to whether they want to keep expanding in the UK, or try to expand the market to Europe – management has indicated that once the 20 store count is reached, European expansion is on the table.  My belief is that we are likely to see well over 20 Motorpoint locations as time goes on.  

Margins 

I expect margins to expand over time as the store base becomes more heavily weighted towards mature stores with much higher margins than the newer ones.  You can get a rough idea for where margins are going by looking at the company’s GP/Overhead figure (gross profit divided by operating expenses) – which peaked at 150% in 2016 (operating expenses were 2/3 of gross profit) and is likely to be closer to 130% this year.  The simple reason behind this is that new store openings require S&M and personnel expenses that are not covered by store gross profits in the opening stages. Breakeven for most stores is in between the first and third full years, at which point marketing begins to fall as repeat customers pick up.  Margins gradually expand from there as marketing falls further and sales growth starts to slow.  

Research suggests if you strip out the negative/zero yielding locations, the GP/Overhead figure would be above 170% (operating expenses fall below 60% of gross profit) - the 150% figure from 2016 included two new store openings which were major negative contributors to margins, and the Birtley site was also a small negative contributor.  On a 7.5-7.6% gross profit margin, this would suggest ~3% EBIT margins, which should rise further as more stores come close to maturity. On FY2021 numbers of £1.2b in sales, this produces EBIT of £36mm. That’s versus an EV of £265mm today - 7.4x EV/EBIT.   

FWIW, I think margins likely go higher over time as they ramp their home delivery program and introduce financing.  Financing seems like it would be the easiest way to increase margins over time and get closer to the KMX’s GP margins, but management has been more focused on slowly opening stores than starting the program.  My best guess from poking around the industry is that Motorpoint will focus on financing over the next 2-3 years, but I am not 100% on that. I know management has considered it, but the timeline is unclear. Given that KMX’s financing division is responsible for >15% of the company’s gross profit, the opportunity here is huge and would provide a big lift to margins – I think management understands this and sees the opportunity.  

Lastly, management has suggested that 4% margins are possible here (not counting financing), so I do not believe 3% is steady state – I think it is higher – with optionality beyond that if financing or home delivery ramps like it could.  

Management

I think Mark Carpenter, the CEO, and James Gilmour, the CFO, are top-notch (if not a little conservative on the growth side).  They’ve built a terrific business that should continue to take share over a long period of time, while also continuing to invest in the business and keep it geared more and more towards the internet and more tech-savvy consumers.  I think virtually every decision they’ve made will allow them to continue to take share in a good or bad car sales market, and they run the business for the long-term.  

As far as being aligned with us on the stock price, Mark owns about 10% of the shares outstanding and has implemented an aggressive buyback plan that creates a great technical tailwind.  

In general I think they are one of the better management duos around.  

Buyback

In May 2019 Motorpoint implemented a £10mm buyback – at the time that was ~6% of market cap.  A few months later, in October, they announced another £10mm buyback – around 5% of market cap at the time of announcement.  The key with the announcement is that the buyback itself, if fully executed, would purchase a substantial amount of the traded volume, while still being a small percentage of the actual market cap.  

Since 9/30/2019 [this excludes the large trading one-off around the an insider share sale – the previous largest shareholder], MOTR has traded on average ~55k share per day.  The buyback, if fully executed at today’s price – which would include 6mm shares from the previous buyback + ~3mm from the current – would be ~9mm shares. Given 250 trading days, the company would purchase approximately 2/3 of all shares traded.  I think this provides downside protection given they suck out a huge portion of seller’s shares over time. Since February 14th, they have been in the market almost every day buying 50k shares around £3.00/share.  It would appear that they were only out of the market on days that it wasn’t possible for them to buy 50k shares – they are aggressive buyers when the shares are actually trading and I think that will continue over the long term.  And my best guess is that they will just increase the buyback as soon as they finish this one.  

The other reason I think the buyback is a tailwind is because the tradeable float is likely much smaller than it would appear, given large management ownership and key LT holders.  Of the 90.5mm shares, Mark Carpenter and Mark Morris (MOTR’s chairman), own ~20% of shares. Immersion Capital and Long Light own a further 24% of shares. Combined that’s 44% of the total shares, leaving £162mm in realistic float market value.  The total amount of shares available to be bought is ~18% of that number, and my guess is an even higher number once you factor in other holders I believe are in this for the long run. I think a lot of float gets taken out of the market, and this will continue for years.  

Conclusion

MOTR is a great business with a long runway and a terrific, shareholder focused management team.  Over the medium term I would expect 6%+ revenue growth with 9-10% EBIT growth as margins expand beyond the 2.2% level today.  Factoring in a 3-4% reduction in shares, and a 2% dividend, I would expect 14-16% IRR going forward, assuming a flat multiple P/E multiple.  However, my assumption is that as the management team becomes better known and the company sucks up a large portion of tradeable shares, the multiple could trade much higher and push the IRR closer to 20%.  In addition, financing and/or home delivery could fuel EBIT growth beyond my baseline assumptions. This is an investment I intend to hold for the long term.  

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