A couple of nice runners

Smaller Companies
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INVESTORS have tended to shun shares in car dealers, which fell out of bed last year after starting with high hopes. The crucial August sales period was a disaster for the volume car manufacturers, who had to dump surplus stocks in the autumn. But as often happens, some good companies have been overlooked in the bloodbath. Two with special promise are Reg Vardy at 211p, and Henly's at 304p.

Convincing evidence of how Sunderland-based Reg Vardy is bucking the trend came with its half-year results to 31 October 1994. Turnover rose by 29 per cent to £184.6m, and pre-tax profits - excluding a one-off property deal - rose by 69 per cent to £5m. That is more than the group has ever made in any full year, other than 1993/94, and continues a pattern of long-term growth that has seen the group develop from one dealership and 15 employees just 15 years ago.

Apart from strong and entrepreneurial management, a key element in Vardy's success has been low exposure to the new-car market. Motor dealers have latched on to the importance of emphasising higher-margin service (parts and body-shop activities) in their turnover mix. Vardy has added to this by being exceptionally early to spot the potential from nearly new and used-car sales. Such is the availability of low-mileage, nearly new cars (eight months old with perhaps fewer than 10,000 miles on the clock) that private buyers are increasingly reluctant to buy new cars and see them lose 40 per cent of their value as soon as they leave the showroom. Vardy sells two used cars for each new model.

Another strength of Vardy is its focus on specialist makes such as BMW, Mercedes-Benz, Jaguar, Lexus and Rolls-Royce, which not only do not face competition from cheap nearly new cars but are also benefiting from strong corporate demand for luxury cars. In a dramatic move to benefit from these trends, the group has just bought 10 dealerships (including one under option) in two separate deals. It is spending approximately £9m on three dealerships that will make it the largest BMW distributor in Britain if not Europe. Demand for BMW is booming: the newly launched Compact sold out for a year ahead.

It is also buying six or seven dealerships from AFG, all but two of which may be developed to sell nearly new and used cars.

Prospects look excellent. Vardy is forecasting turnover for 1995/96 of over £500m against the £370m or so expected for the year to the end of this month. That should support pre-tax profits rising from £8.4m for 1993/94 to £10.25m this year, £13.5m next and £15m plus for the year to April 1997. By then, the p/e ratio at the current share price would be in single figures, leaving room for a substantial rise in the share price.

Unlike Vardy, Hertfordshire-based Henly's was in the frontline of the autumn slump with approximately 80 per cent of its motor business exposed to the top-volume car manufacturers. The group is already moving to rectify this, with the recent acquisition of 10 dealerships to strengthen its exposure to such specialist marques as Suzuki, Volkswagen, Audi, Jeep and Honda.

This will help future performance in the motor division. But the real trump card powering Henly's ahead is the turbocharged performance of its bus and coach body-building division, where the group is now the leader in an increasingly buoyant market.