Adverse reaction hard to justify

Lookers 6 July 2016 Update

Lookers

Adverse reaction hard to justify

Interim results preview

Retail (automotive)

6 July 2016

Price

100.75p

Market cap

£399m

Net debt (£m) at 31 December 2015

161.7

Shares in issue

396.2m

Free float

80%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.0)

(20.7)

(21.0)

Rel (local)

0.3

(19.7)

(12.1)

52-week high/low

185p

129.7p

Business description

Lookers is a leading UK motor vehicle and specialist parts distributor. It now operates more than 150 franchises, representing 31 marques spread across the UK, with strong regional presences in Northern Ireland, Scotland, the South East and across Northern England

Next events

Interim results

Mid August 2016

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Lookers is a research client of Edison Investment Research Limited

A weak share price reflects fears about a post-Brexit economy rather than current trading, which remains on course. The challenge may again be formidable, but there are opportunities that a strong management team can use to demonstrate the quality of the group’s earnings.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

3,043

65.0

13.21

2.84

7.6

2.8

12/15

3,649

72.1

14.88

3.12

6.8

3.1

12/16e

4,150

80.0

16.14

3.25

6.2

3.2

12/17e

4,300

83.0

16.71

3.40

6.0

3.4

Note: * PBT and EPS are normalised and diluted, before intangibles amortisation, debt issue costs, share based payments, pension costs and exceptional items.

Another good half-year expected

The vibes for the first half of 2016 are positive: new car registrations were up by 4.1%, including 3.2% in retail, over the first five months of the year; the used car market is indicated also to be slightly better; the aftermarket, especially in the 0-3 year-old segment, is also usefully higher. Lookers’ May trading statement reported Q1 gross profits in these segments of the business to be ahead by 23%, 23% and 25%, respectively. While these figures are inflated by the impact of last year’s £85m Benfield Motors acquisition, the 5% rise in like-for-like gross profits is a useful guide for performance. The Parts division also reported steady progress, despite ongoing challenging conditions. Interim results, due to be announced in mid-August, should show sound progress. To be on course to deliver our full-year estimates, we look for H116 revenue of £2.2bn, with underlying PBT up by some 12.5% to £48.5m.

Industry dynamics remain favourable

We have, for some time, indicated industry dynamics favouring the larger groups. The franchised dealership market remains fragmented (Lookers is a top three player with a 3.4% share); many smaller businesses struggle to meet the expectations of the OEMs in terms of upgrading facilities, while few can match the internet presence of the larger groups supporting their used car and aftermarket operations. The UK motor market is mature, with new vehicle registrations peaking last year at levels little different from the previous record, back in 2003. Over this period, Lookers has delivered 9.2% CAGR in diluted EPS, including record profits in each of the past seven years. Brexit offers more new challenges (new car registration forecasts have been reduced), but we are confident of the group’s ability to continue growing consistently over the medium term.

Valuation: Sector qualities not recognised

The Lookers share price is down by 39% from its 12 month high and by 25% since the Brexit vote – similar movements have been seen in other motor retail stocks. The prospective rating for CY16 is slightly below the sector average (P/E 6.2x vs 7.5x) and 44% below that of the FTSE All-Share General Retailers Index (12.6x); this discount ignores the resilience shown during previous recessions and the potential from recent investments.

Exhibit 1: Financial summary

Year end 31 December

£m

2010

2011

2012

2013

2014

2015

2016e

2017e

Accounting basis

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

1,884

1,899

2,057

2,465

3,043

3,649

4,150

4,300

Cost of Sales

(1,623.2)

(1,645.9)

(1,753.3)

(2,128.7)

(2,646.8)

(3,196.9)

(3,645.0)

(3,775.0)

Gross Profit

260.6

252.6

303.3

335.8

396.1

452.2

505.0

525.0

EBITDA

 

54.7

54.5

60.0

67.7

87.0

99.6

109.5

112.5

Operating Profit (pre amortisation and except.)

 

46.9

45.2

49.2

58.4

76.6

85.9

95.0

97.5

Intangible Amortisation

(1.3)

(1.3)

(1.1)

(1.1)

(1.2)

(1.6)

(1.6)

(1.6)

Exceptionals

0.0

0.0

0.0

0.0

0.0

(1.9)

0.0

0.0

Other

(1.2)

(1.1)

(2.6)

(3.1)

(3.5)

(4.3)

(4.3)

(4.3)

Operating Profit

44.4

42.8

45.5

54.2

71.9

78.1

89.1

91.6

Net Interest

(13.3)

(11.4)

(11.2)

(10.3)

(11.6)

(13.8)

(15.0)

(14.5)

Profit Before Tax (norm)

 

33.6

33.8

38.0

48.1

65.0

72.1

80.0

83.0

Profit Before Tax (FRS 3)

 

31.1

31.4

34.3

43.9

60.3

64.3

74.1

77.1

Tax

(8.2)

(6.2)

(8.0)

(7.7)

(12.4)

(12.0)

(14.5)

(15.2)

Profit After Tax (norm)

 

25.4

27.6

30.0

40.4

52.6

60.1

65.5

67.8

Profit After Tax (FRS 3)

 

22.9

25.2

26.3

36.2

47.9

52.3

59.6

61.9

Average Number of Shares Outstanding (m)

383.5

383.8

387.1

388.1

389.2

394.4

396.2

396.2

EPS - normalised (p)

 

6.62

7.19

7.72

10.36

13.52

15.24

16.53

17.11

EPS - normalised fully diluted (p)

 

6.49

7.02

7.56

10.16

13.21

14.88

16.14

16.71

EPS - FRS 3 (p)

 

5.97

6.57

6.77

9.28

12.31

13.26

15.04

15.62

Dividend per share (p)

1.80

2.18

2.35

2.58

2.84

3.12

3.25

3.40

Gross Margin (%)

13.8%

13.3%

14.7%

13.6%

13.0%

12.4%

12.2%

12.2%

EBITDA Margin (%)

2.9%

2.9%

2.9%

2.7%

2.9%

2.7%

2.6%

2.6%

Operating Margin (before GW and except.) (%)

2.5%

2.4%

2.4%

2.4%

2.5%

2.4%

2.3%

2.3%

BALANCE SHEET

Fixed Assets

 

255.1

253.3

273.3

292.1

329.8

441.2

447.1

452.5

Intangible Assets

60.5

62.2

76.2

87.5

114.2

158.3

156.7

155.1

Tangible Assets

194.6

191.1

197.1

204.6

215.6

282.9

290.4

297.4

Investment in associates

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

428.6

480.1

559.2

659.3

791.2

1,143.9

1,200.7

1,260.3

Stocks

292.3

349.6

423.5

499.6

605.9

883.0

927.2

973.5

Debtors

104.2

109.1

123.8

154.0

179.4

252.6

265.2

278.5

Cash

24.3

17.9

8.7

5.2

5.9

8.3

8.3

8.3

Other

7.8

3.5

3.2

0.5

0.0

0.0

0.0

0.0

Current Liabilities

 

(387.0)

(433.5)

(513.0)

(610.3)

(725.2)

(1,085.4)

(1,095.6)

(1,122.4)

Creditors/Other

(372.9)

(424.9)

(497.3)

(595.8)

(705.0)

(1,002.0)

(1,052.0)

(1,104.1)

Short term borrowings

(14.1)

(8.6)

(15.7)

(14.5)

(20.2)

(83.4)

(43.6)

(18.3)

Long Term Liabilities

 

(115.1)

(102.8)

(115.7)

(113.1)

(138.9)

(201.9)

(179.6)

(171.6)

Long term borrowings

(66.8)

(48.8)

(41.2)

(33.8)

(37.6)

(86.6)

(76.6)

(68.6)

Other long term liabilities

(48.3)

(54.0)

(74.5)

(79.3)

(101.3)

(115.3)

(103.0)

(103.0)

Net Assets

 

181.6

197.1

203.8

228.0

256.9

297.8

372.6

418.8

CASH FLOW

Operating Cash Flow

 

49.3

40.8

48.4

55.9

55.1

58.0

98.2

100.9

Net Interest

(13.2)

(11.4)

(12.4)

(10.3)

(11.6)

(13.8)

(15.0)

(14.5)

Tax

(5.9)

(6.7)

(7.8)

(8.1)

(8.9)

(11.3)

(13.9)

(15.0)

Net Capex

(5.3)

1.5

(11.6)

(3.8)

(10.0)

(28.0)

(25.0)

(25.0)

Acquisitions/disposals

0.0

0.2

(17.4)

(19.3)

(24.5)

(104.4)

18.0

0.0

Financing

0.0

1.5

0.4

0.3

1.6

0.9

0.0

0.0

Other

0.0

(1.1)

0.1

(0.1)

(0.1)

0.4

0.0

0.0

Dividends

(2.3)

(7.7)

(8.4)

(9.5)

(10.4)

(11.6)

(12.5)

(13.1)

Net Cash Flow

 

22.6

17.1

(8.7)

5.1

(8.8)

(109.8)

49.8

33.3

Opening net debt/(cash)

 

79.2

56.6

39.5

48.2

43.1

51.9

161.7

111.9

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.0)

(0.0)

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

56.6

39.5

48.2

43.1

51.9

161.7

111.9

78.6

Source: Lookers accounts, Edison Investment Research

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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US

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Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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