The last quarter of 2019 saw strong share price movements for many of the Forager International Shares Fund holdings. Overall, the net asset value increased by a touch under 11%, versus an increase in the MSCI World Index of less than 5%.
Returns were driven by some good newsflow from the Fund’s largest investment Blancco, US-listed Zebra Technologies and further rapid growth at Clearpay, the UK subsidiary of Afterpay. The Fund has a meaningful interest in Clearpay through UK-listed Thinksmart. The share price of the latter was £0.08 just six months ago. It has since distributed about £0.03 per share of cash to shareholders and ended the year trading at £0.23.
Then the Tories won December’s UK election by a huge majority. While there is plenty of negotiating yet to be done, the UK will be officially leaving the European Union at the end of January. Five years ago, that would not have been seen as a good thing for UK stock prices.
Yet many share prices, particularly the smaller, domestically focussed stocks, rallied hard leading into the election and rose further in the days after the result was announced. That’s because any Brexit is better for business than a Jeremy Corbyn-led Labour government, and the margin of the victory makes a “softer” Brexit more likely. A small group of hard core nationalists inside the Tory party will have less blackmail leverage than if the result had been closer.
It is also because so much pessimism had been priced into the UK stock market. It remains one of the cheapest in the world, and we remain excited about the opportunities available. One good example is car supermarket Motorpoint.
Bagged a bargain with Motorpoint
Motorpoint Group runs 12, soon to be 13, used car dealerships across the UK. Car dealerships have a reputation for poor economics—slim margins, heavy investment requirements, cyclical and poor returns on those investments over the cycle. Most listed UK dealerships live up to that reputation. Motorpoint is different.
Its sites are big, typically 500 or more cars on each site. The group sells near new vehicles, less than 2 years old driven fewer than 15,000 miles. It sells them cheaply in a low pressure environment. Fixed price and no haggle is a model that’s worked well elsewhere, particularly in a world where most consumes have already researched their purchase online.
It stocks a wide range. Unlike franchised dealers, it is not beholden to any car maker and can source whatever is cheapest or most in demand. It even buys unsold inventory in bulk, direct from other dealerships. If you’ve got 1,000 cars of the same make, model and even colour, and want to move them with a single phone call, Motorpoint is one of the few numbers worth dialling.
It sources those cars cheaper than most but marks them up no more than other dealerships, passing on the savings to customers. This enables it to move stock significantly faster than the competition. That makes Motorpoint less capital intensive than most dealerships and enables it to generate higher profit from each car slot over the course of a year. This explains its industry crushing return on equity.
Strength in difficult times
The March-June quarter was a particularly tough one for the UK used car market, exacerbated by several major franchised dealerships destocking inventory in order to generate desperately needed cash. Used car prices fell and Motorpoint wasn’t spared some pain. But the business has rebounded strongly since July and the company has been taking significant market share in all of its markets.
Despite being a growing company, Motorpoint is able to return most of its profit to shareholders via dividends and buybacks. Opening up a new site takes a humble net investment and starts contributing meaningfully to profit from the third year of operation. New sites thus create significant value for shareholders. After a pause in new openings over 2018 caused by the paucity of sites available (at least at the prices Motorpoint is prepared to pay), it was our hope that management would soon resume new openings. There are good signs on this front.
The 13th site, Swansea in Wales, opens soon. West Glasgow is next and the company almost has its talons on a 15th site. The financial troubles of other car retailers even opens up the opportunity to buy their unwanted sites on the cheap.
The Fund initially acquired shares in May during the industry downturn and added in September when the founder, who’s no longer involved in the business, sold discounted stock to settle a divorce. We’ve bought at a price earnings ratio of 11 times, arguably a premium to the franchised players (who won’t actually make any money in 2019) but the comparison is chalk and cheese. Motorpoint is a business that will continue winning market share, particularly in any downturn. The stock is up 40% on the Fund’s average purchase price, but we haven’t sold a single share yet.
This is an excerpt from the upcoming December Quarterly Report – if you would like to receive this report (and all future reports) in your inbox, you can register to do so here.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.