Smaller Companies: Motor World takes the high road to market

MOTOR WORLD, which sells motor parts and accessories from 180 shops in the North of England, is the latest management buyout from the late 1980s to join the stock market.

Dealings are expected to begin on Thursday and demand is thought to have been strong. That should ensure a firm debut.

An institutional placing of six million shares at 210p at the end of last week raised pounds 12.2m and valued the company at pounds 27.7m. The placed shares represent 45 per cent of the enlarged equity and leave management with 13 per cent of the company.

Over the past five years the number of Motor World outlets has grown steadily from 115. Pre- tax profits have risen equally impressively during the period from pounds 456,000 to pounds 2.29m in the year to last November.

That is an impressive performance, especially when compared with the dismal showing of its rival Halfords, owned by Boots, which is only just being turned round after a string of losses.

Darrell Kershaw, managing director, puts the success down to two differences from Halfords - 'We don't sell bikes and our shops have low overheads.'

Sticking to car parts means Motor World can stock as many as 4,000 lines and a concentration on staff training means that, for a change, customers can get sensible advice from shop assistants.

Overheads are kept low by siting shops on busy roads away from expensive town centres. 'If we get it wrong we can move quickly,' says Mr Kershaw.

Over the past five years he thinks the group has closed 25 shops because they failed to generate a decent return: 'Because they are low-rent outlets we can get rid of the leases pretty easily.'

Expansion is pencilled in at 10- 15 per cent a year and Motor World thinks it has the infrastructure to cope with up to 300 shops. It plans moves into Scotland and South-east England.

Motor World also runs a warehouse distribution operation, providing about a third of group profits. Autogem supplies small parts and tools to the trade, including fast-fit operators such as Kwik-Fit and Superdrive. There is also a metal pressings operation supplying Rover cars.

Proceeds of the placing will be used to pay off debt, reducing gearing to 12 per cent from its current level of 360 per cent.

Pro forma earnings per share in the year to last November were 16p and, had the shares been in issue throughout last year, the directors say they would have paid a total dividend of 6.3p.

That puts the shares on a p/e of 13 at the placing price and gives a yield of 4 per cent, which suggests that Beeson Gregory, which placed the shares, has been relatively cautious.

Motor World has an attractive record although analysts warn that similar operations have come and gone in the past.

That said, with the new car market showing signs of perking up - sales have been up year-on-year for four consecutive months - Motor World's successful formula should continue to impress.