Maintaining performance

Lookers 9 November 2018 Update
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Lookers

Maintaining performance

Q3 trading update

Automotive retailers

9 November 2018

Price

98p

Market cap

£384m

Net debt (£m) at 30 June 2018

54.5

Shares in issue

392m

Free float

80%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

(6.7)

0.0

Rel (local)

(0.6)

1.4

5.5

52-week high/low

112.2p

82.0p

Business description

Lookers is vying to be the largest UK motor vehicle retailer, with its new car operations supported by the strength of used and aftersales activities. It now operates 155 franchises, representing 32 marques from 100 sites around the UK, with strong regional presences in Northern Ireland, Scotland, the South East and across northern England.

Next event

FY18 results

February 2019

Analysts

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Lookers is a research client of Edison Investment Research Limited

Lookers maintained its outlook for the current year, notwithstanding supply-side disruption that created volatility in new car markets in Q318. Used car and aftersales activities remain healthy and Q318 trading was ahead against a strong Q317. There are signs of stabilisation in new car markets in Q418 and Lookers expects to deliver against market expectations for the full year. However, a more cautious view as Brexit looms leads us to reduce our FY19e EPS by 6%. Nevertheless, the undemanding rating remains supported by an attractive yield.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

4,088.2

64.9

13.13

3.64

7.5

3.7

12/17

4,696.3

68.4

14.14

3.89

6.9

4.0

12/18e

4,835.4

67.7

13.70

4.08

7.2

4.2

12/19e

4,824.2

66.4

13.65

4.17

7.2

4.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Robust trading performance in volatile Q3

When considering motor retailers, investors’ attention tends to be drawn towards New car performance, despite the fact that for Lookers two-thirds of gross profit is generated by the higher-margin Used and Aftersales segments. Both of these businesses continued to trade healthily through Q318. Margins in New cars actually improved, despite a sharp drop in sales and volumes. Q318 new car demand was highly volatile due to the introduction of the Worldwide Harmonised Light Vehicle Testing Procedure (WLTP) emission regime on 1 September. For the first nine months, Lookers saw new car revenues fall 7%, in line with the UK market, and gross profit fell by 5%. Used car revenues and gross profit grew 10%, and the high-margin Aftersales activity grew gross profit 6% on revenues up 5%.

More stable market conditions anticipated

As discussed in our last note, Lookers expected volatility in new car markets in H218 as initial supply constraints were worked through, but overall a neutral impact. The outcome seems increasingly likely as UK new car registrations showed a 2.9% decline in October, despite some clear ongoing effects from WLTP on a few manufacturers. The recently issued SMMT forecast now indicates a new car market down 6.3% in 2018, which compares to the year-to-date decline of 7.2%. With Brexit looming, the forecast is for a UK new car market of 2.325m cars, 2.7% below the July forecast. This has led us to reduce our FY19 earnings forecast by 6%. Used car and Aftersales trends remain supportive as we expect Lookers to outperform the underlying markets. The balance sheet continues to facilitate suitable acquisitions, as indicated by the £5.5m purchase of Jennings Group in September.

Valuation: Rating remains undemanding

Along with the other UK motor retailers, Lookers’ share price performance has suffered since the interims as volatile new car data has remained the focus. The shares currently trade on an FY19e P/E of 7.2x, which remains undemanding.

Outlook

WLTP has caused major monthly volatility in the UK new car markets during both August and September, with pre-registrations boosting the former and a restricted supply of vehicles from several manufacturers depressing the latter. While October shows a more modest 2.9% decline, there are clearly some ongoing effects from WLTP affecting a few manufacturers. As a result, the SMMT now expects the 2018 UK new car market to decline 6.3% to 2.831m registrations.

While the trend is improving in Q4, few of the underlying issues affecting demand have been addressed. Consumers may be hearing of an end to austerity with almost full employment in the UK, but with Brexit looming in H119, and policies towards new cleaner diesels still failing to provide any support, the outlook for FY19 remains subdued

The SMMT forecast is now for further modest declines for 2019 (-2.4%) and 2020 (-1.0%) in UK new car sales. It should be noted that this still represents strong levels of demand compared to historic levels. We also expect to see a more normal seasonal trading pattern compared to this year and last. We expect some effects to used car and aftersales trends but we believe remain more supportive

While our FY18 numbers remain as previously, we have reduced our FY19 PBT and EPS forecasts to reflect the more subdued markets, as shown below:

Exhibit 1: Lookers revisions to earnings estimates

Year to December (£m)

2018e

2019e

Prior

New

% change

Prior

New

% change

New

2,446.8

2,446.8

0.0%

2,486.0

2,412.6

-3.0%

Used

1,873.0

1,873.0

0.0%

1,966.6

1,891.7

-3.8%

Aftersales

429.2

429.2

0.0%

446.4

429.2

-3.8%

Leasing

86.4

86.4

0.0%

90.7

90.7

0.0%

Total sales

4,835.4

4,835.4

0.0%

4,989.7

4,824.2

-3.3%

EBITDA

105.2

105.2

0.0%

107.9

103.3

-4.3%

Underlying EBITA

84.3

84.3

0.0%

86.8

82.8

-4.6%

Underlying PBT

67.7

67.7

0.0%

70.4

66.4

-5.6%

EPS - underlying continuing (p)

13.7

13.7

0.0%

14.5

13.7

-5.6%

DPS (p)

4.08

4.08

0.0%

4.29

4.17

-2.9%

Net debt/(cash)

66.7

66.7

0.0%

56.5

57.3

1.4%

Source: Edison Investment Research estimates

We have also reduced our expectation for the FY19 dividend to an inflationary 2% increase that maintains earnings cover at over 3x, but still provides a healthy yield for investors.

Exhibit 2: Financial summary

£m

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,088.2

4,696.3

4,835.4

4,824.2

Cost of Sales

(3,638.7)

(4,192.2)

(4,327.7)

(4,317.7)

Gross Profit

449.5

504.1

507.7

506.5

EBITDA

 

 

97.6

105.4

105.2

103.3

Operating Profit (before amort. and except.)

 

 

82.5

84.7

84.3

82.8

Intangible Amortisation

0.0

0.0

0.0

0.0

Exceptionals

14.7

(10.0)

(4.5)

(12.1)

Other

0.0

0.0

0.0

0.0

Operating Profit

97.2

74.7

79.8

70.7

Net Interest

(17.6)

(16.3)

(16.6)

(16.4)

Profit Before Tax (norm)

 

 

64.9

68.4

67.7

66.4

Profit Before Tax (FRS 3)

 

 

79.6

58.4

63.2

54.3

Tax

(7.9)

(10.5)

(12.7)

(11.1)

Profit After Tax (norm)

53.3

57.9

55.5

54.5

Profit After Tax (FRS 3)

71.7

47.9

50.4

43.2

Average Number of Shares Outstanding (m)

396.4

397.3

393.2

386.9

EPS

 

 

13.4

14.6

14.1

14.1

EPS - normalised fully diluted (p)

 

 

13.13

14.14

13.70

13.65

EPS - (IFRS) (p)

 

 

18.1

12.1

12.8

11.2

Dividend per share (p)

3.6

3.9

4.1

4.2

Gross Margin (%)

11.0

10.7

10.5

10.5

EBITDA Margin (%)

2.4

2.2

2.2

2.1

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

2.0

1.8

1.7

1.7

BALANCE SHEET

Fixed Assets

 

 

536.5

563.2

572.6

596.1

Intangible Assets

217.4

221.2

220.5

219.8

Tangible Assets

319.1

342.0

352.2

376.3

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

1,171.3

1,332.4

1,344.8

1,345.9

Stocks

839.4

984.1

967.1

945.6

Debtors

292.1

303.0

322.4

325.1

Cash

39.8

45.3

55.3

75.3

Other

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(1,130.3)

(1,294.2)

(1,251.8)

(1,236.5)

Creditors

(1,105.2)

(1,228.1)

(1,251.8)

(1,236.5)

Short term borrowings

(25.1)

(66.1)

0.0

0.0

Long Term Liabilities

 

 

(235.8)

(216.4)

(263.6)

(276.4)

Long term borrowings

(88.8)

(77.0)

(122.0)

(132.6)

Other long term liabilities

(147.0)

(139.4)

(141.6)

(143.8)

Net Assets

 

 

341.7

385.0

402.0

429.1

CASH FLOW

Operating Cash Flow

 

 

130.5

65.9

121.9

102.7

Net Interest

(13.8)

(17.6)

(16.3)

(16.6)

Tax

(17.3)

(10.5)

(12.7)

(11.1)

Capex

(45.5)

(54.2)

(51.0)

(49.6)

Acquisitions/disposals

18.9

0.0

0.0

0.0

Financing

0.0

0.0

(10.0)

0.0

Dividends

(13.2)

(15.0)

(15.7)

(16.1)

Other

28.0

7.7

15.0

0.0

Net Cash Flow

87.6

(23.7)

31.1

9.4

Opening net debt/(cash)

 

 

161.7

74.1

97.8

66.7

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

74.1

97.8

66.7

57.3

Source: Company reports, Edison Investment Research estimates

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Lookers and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Lookers and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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