Key factors affecting 2017 automotive activity

8 March 2018

In the latest in our series of automotive transactional activity blogs, we look at the trends shaping 2017 activity in greater detail and share some of our prospects for 2018.

International interest

One of the clearest dynamics of the 2017 market has been the level of international based companies driving activity. All of the larger deals reported have been acquired by an international owner and overall 28% by volume of activity is attributed to these purchasers.

It has been reported that UK valuation multiples are lower than those reported overseas. Pricing in the table below for the quoted motor retail stocks illustrates the scale of the variance, without doubt leading to the perception of value in the UK. Given the low multiples, UK plc’s could be considered attractive takeover targets, particularly to a significant international player looking to create a scaled presence in the UK.

                                                P/E multiple*

UK**                                     6.0         

US                                          12.4

South Africa                       16.5

*Weighted average multiple as at 21 November 2017

** Excluding Inchcape due to the international dimension of this business. Inchcape current p/e ratio is 15 times.

With the likes of Sytner, Group 1, ALJ, Imperial, Super Group and Marubeni already well invested in the sector, it is very likely that others will follow.

Ongoing impact of Brexit

We are often asked to provide views post the Brexit announcement. At the end of 2016 we reported that, in our view, Brexit had helped drive the market due to the sharp reduction in the strength of sterling and corresponding increase in attractiveness of the UK to overseas investment. This certainly continues to be the case, although how long this trend can continue remains to be seen. In our view, the reduction in levels of trading activity noted in quarter 4 of 2017 will inevitably soften the appetite of certain investors.

Ultimately this is a question of supply and demand with the market being generally well balanced at present. Supply into the market remains strong and, whilst pricing is maintained at or around current levels, it is likely to remain so. Demand is also showing no signs of abating, with a sustained appetite for the right businesses. This is helped by the continuing international funds as well as good availability of debt financing and generally strong and well geared balance sheets following a sustained period of healthy and profitable trading. .

Of course, ongoing appetite to grow and acquire businesses is very much dependent on there being a positive sentiment surrounding day to day trading.

Impact of potential move to greater levels of online retailing

There has been significant reporting around the trend towards online retailing of motor vehicles. Whilst there has been much discussion, it appears to have had little or no impact in the longer term strategic thinking of the key consolidation players. They appear to remain focused on scale and growing market share, particularly with brand partners that are also growing market share, as they look to balance their own representation with the ever changing appetite of the consumer.

However, the rise of online sales could make it increasingly difficult for the smaller, more traditional businesses to justify their relevance in the market, potentially resulting in a rise in distressed, smaller businesses entering the market.

Consolidation of used vehicle retailing

Following on from the 2016 stock market listing of Motorpoint, 2017 saw Sytner acquire Car Shops, a scaled independent used vehicle retailer. At present, the used vehicle retailing market is largely fragmented and in the hands of owner drivers. We see significant potential for further consolidation and innovation in this critical and, in the right hands, highly profitable element of the sector.

Levels of UK plc activity

We have seen a significant fall in the volume of activity carried out by the UK based plc consolidators. This is believed to be due to a combination of factors:

  1. Their own share price is significantly depressed. This is translating into offers from UK companies typically below those that can be generated from international players.
  2. They have been through several years of intense activity and have been focussed on investment and optimisation of these recent acquisitions.
  3. They still have significant resources and ‘war chests’ and are anticipating a return to greater value for money in the market.

Smaller volume and niche businesses

For all the general buoyancy in the market, it remains challenging to deliver value for those wishing to exit a smaller business operating in the volume or niche sector. There are many strong businesses which are delivering, or are capable of delivering, a reasonable return but do not attract the interest of the bigger players. There are also exceptions to the rule too, with the Kia brand being particularly attractive, especially to medium sized dealer groups looking to increase the diversity within their portfolios.

Want to know more?

In our final blog of the series  next week we will share our conclusions about what we expect to see happen during 2018.

In the meantime, if you are contemplating your options in 2018 or have any questions about this blog, please contact David Kendrick or Paul Daly for a no obligation, confidential discussion. Alternatively contact an automotive expert at your nearest location.

To read more about the transactional services we provide to the automotive sector, or to find details of your local UHY automotive expert, please visit our automotive corporate finance support pages.