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Lookers 10 January 2022 Update
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Lookers

Normal service has been resumed

Strategic review/
FY21 update

Automotive retail

10 January 2022

Price

74p

Market cap

£289m

Adjusted net cash (£m) at 30 December 2021 (excluding lease liabilities)

c 8.0

Shares in issue

390.5m

Free float

79%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

28.3

15.5

251.9

Rel (local)

26.2

9.8

220.5

52-week high/low

74p

21p

Business description

Lookers is one of the largest UK motor vehicle retailers, with its new car operations supported by the strength of used and aftersales activities. It now operates 153 franchises, representing 33 marques from 100 sites around the UK and Ireland, with strong regional presences in Northern Ireland, Scotland, the Southeast and across northern England.

Next events

FY21 results

13 April 2022

Analyst

Andy Chambers

+44 (0)20 3681 2525

Lookers is a research client of Edison Investment Research Limited

Lookers now expects to deliver a record profit performance in FY21 with adjusted profit before tax (PBT) ahead of market consensus expectations of c £82m. We increase our FY21 PBT estimate by 5% to £86.0m although caution remains around FY22 where our is estimate broadly unchanged. The operational environment appears to have returned to normal following the internal issues that have dogged the company since 2019. That is reflected in the unveiling of a major review of the group to position it for the long-term challenges and opportunities developing in the UK automotive market. The resumption of the dividend and a FY22 P/E of just 7.1x look undemanding considering the recent crystallisation of value elsewhere in the sector.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

4,807

4.0

0.81

1.48

91.4

2.0

12/20

3,700

14.1

2.92

0.00

31.2

0.0

12/21e

4,331

86.0

17.36

2.00

4.3

2.7

12/22e

4,528

51.4

10.36

3.30

7.1

4.5

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

Positive trading momentum continued through Q421

Lookers should deliver a record earnings performance in FY21 following a strong Q421 trading performance. Management now expects adjusted PBT to exceed market consensus expectations of c £82m and we increase our estimate to £86.0m (from £81.8m). As previously announced, Lookers has repaid all of its FY21 furlough receipts of £4.1m and has now decided to repay non-essential retail sector COVID-19 grants received of £1.9m in FY22. The balance sheet remains strong, with year-end adjusted net cash of c £8.0m (FY20 £40.7m net debt). The board has indicated its intention to restart dividends with FY21 results on 13 April 2022.

Review heralds return to investing for growth

The refreshed board commenced a major review in October 2021 to improve the operational performance and address long-term market trends including changes in consumer behaviour, electrification, the competitive landscape, OEM relationships, new technologies and regulation. The company has identified six pillars to leverage its strong existing position: continued operational optimisation, investing in new technology and digitalisation, expanding the OEM relationships to include new partners and agency models, increasing used vehicle penetration, developing new Aftersales revenue streams and leveraging its Corporate Leasing and Fleet activity.

Valuation: Starting to reflect recovery and growth

While FY22 has started with a strong order bank, management remains cautious about the vehicle supply issues as the volume/margin trade off should probably start to wane as new vehicle supply improves during FY22 and inflationary cost pressures increase. We still anticipate a strong performance when compared to pre-pandemic FY19 trading and we would expect the FY22 P/E multiple to expand as the resumption of a sustainable growth strategy is executed.

Revisions to earnings estimates

In line with its peers, trading continues to be driven by the favourable mix of higher margins in new and used car segments as supply shortages constrained vehicle availability. Used car prices rose from April 2021 onwards and currently remain high although volumes are being increasingly constrained, falling by 14% in Q421. New car unit sales rose 2% and aftersales revenues grew by 7.1% in Q421.

We expect the improved margin performance to generate adjusted PBT of £86.0m in FY21, 5% ahead of our previous estimate. While year-end adjusted net cash (before lease liabilities) of c £8m is lower than we expected, mainly due to tax payments during Q421, it still represents a significant strengthening compared to the FY20 adjusted net debt position of 40.7m.

Caution remains around margin levels in FY22 and the resultant trading performance as the supply constraints should progressively moderate and inflationary issues are compounding. While we maintain our FY22 trading expectations, the lower than expected opening cash levels and higher growth investment following the business review leave net interest slightly higher, reducing adjusted PBT and EPS by just over 1%.

Exhibit 1: Lookers earnings revisions

Year to December (£m)

2021e

2021e

 

2022e

2022e

 

Prior

New

% change

Prior

New

% change

New

1,961.5

1,961.5

0.0%

2,094.4

2,094.4

0.0%

Used

2,188.3

2,188.3

0.0%

2,232.1

2,232.1

0.0%

Aftersales

429.9

429.9

0.0%

442.8

442.8

0.0%

Leasing

160.3

160.3

0.0%

165.1

165.1

0.0%

Intra-group

-409.1

-409.1

0.0%

-406.3

-406.3

0.0%

Sales

4,330.9

4,330.9

0.0%

4,528.0

4,528.0

0.0%

 

 

 

 

 

 

EBITDA

176.1

180.6

2.5%

150.4

150.4

0.0%

 

 

 

 

 

 

Underlying EBITA

116.2

120.7

3.9%

86.4

86.4

0.0%

Underlying OPBIT

110.8

115.3

4.0%

81.1

81.1

0.0%

Underlying PBT

81.8

86.0

5.2%

52.1

51.4

-1.4%

 

 

 

 

 

 

EPS – underlying continuing (p)

16.51

17.36

5.2%

10.51

10.36

-1.4%

DPS (p)

2.00

2.00

0.0%

3.30

3.30

 

Net debt/(cash)

(23.2)

(8.5)

-63.3%

(7.3)

16.9

-331.6%

Source: Edison Investment Research estimates

In March 2020, as part of its COVID-19 related cash management initiatives Lookers suspended dividend payments. Following the repayment of all CJRS (Coronavirus Job Retention Scheme) receipts and COVID-19 grants relating to 2021, the financial position of the group remains strong. The revised capital allocation policy is intended to provide a balance between investing in the business and returns to shareholders, while retaining financial discipline. If current trading conditions are maintained, Lookers expects to resume payments when it publishes its 2021 financial statements.

Review of the group to underpin future growth potential

With the board refreshed during the pandemic following the regulatory and fraud issues, a review of the group is a natural progression as the resumption of more normal trading was established once the legacy issues were resolved. The company has now revealed that review process commenced in October 2021 and has unveiled the initial outcomes with more detail to be presented with the FY21 results on 13 April 2022.

While the strategy of the right brands in the right locations with excellent service remains at its core the board has established six pillars to support and maximise revenue and profit opportunities and deliver new initiatives for growth. These are

Operational optimisation: in addition to portfolio optimisation of the dealerships the core of the strategy remains the focus on improving organic growth of the existing operations. The harmonisation and simplification of operational processes, systems and structures to improve financial performance and efficiency in several key areas should see initial benefits in FY22 according to management. It also expects the continued expansion of financial products as an opportunity to improve profitability and customer retention as the pandemic wanes.

Investments in technology and digitisation: supporting the operational improvement and key to its implementation, Lookers is to increase its investment in technology to improve the customer experience and management of customer relationships, reducing the cost to serve and driving further working capital benefits. As well as addressing the omnichannel experience for customers, the spend includes funds to harmonise and standardise its DMS (Dealer Management Systems) in 2022, allowing it to build improved data analytics and a new sales platform.

Expanding OEM relationships: while maintaining financial discipline the group intends to deepen and expand its OEM relationships to grow market penetration with both existing and new brand partners. It should also seek to adapt to and exploit opportunities arising from the introduction of agency models in place of the traditional franchise agreements. in December 2021 Daimler Benz (Lookers has 14 dealerships) announced it is moving to such a model in the UK. Lookers gained agency experience in 2021 as it commenced its expanding relationship with Polestar. The board also sees investment in new brand partners as key to growth.

Increasing used vehicle penetration: the development of used car market penetration has been a key element of strategy for many years, which to a degree has positioned Lookers well to cope with the extraordinary market conditions that prevailed through 2021. However, the board believes that the used vehicle market presents further significant growth opportunities, highlighted by the success of several recent new market entrants. The existing multi-franchise standalone used car infrastructure is to be extended and expanded using technology and investment in dedicated used car facilities including servicing operations. It intends to provide a competitive offering to the operations and services of the new entrants and expects to drive significant used car volume growth from FY22.

Developing aftersales revenue streams: as we have previously noted the transition to EV is accelerating and will require adaptation investment in the high margin Aftersales operations of the UK franchise dealers. Lookers intends to develop and implement new products and services to protect market share and increase penetration to drive revenue growth. Again, it has identified opportunities to develop and bring in house opportunities in the growing cosmetic repair market which are currently directed to third-party operators.

Leveraging corporate leasing and fleet capabilities: the corporate leasing sector is still regarded as an important and complementary market by Lookers with more stable, predictable revenue streams, as well as new subscription-based product opportunities. In FY22 it intends to consolidate and grow its existing operations and to introduce new products and services for its corporate customers.

The establishment of a framework for the future development of the group, addressing the emergence of competitive threats and challenges within its markets, appears to indicate that Lookers is back, competing to deliver its ambition to be the preeminent UK automotive retail and services group.

Valuation

Although the pandemic-induced supply chain and operational challenges remain, the new strategy indicates to us that Lookers has starting to operate normally once more following the internal shocks of the fraud and FCA investigations, which are now resolved.

The new strategy should serve to improve the quality of earnings by increasing and stabilising profitability and cash flow. It should also prepare Lookers for the transition to electric vehicles (EVs) and the likely shift to agency models, reducing working capital requirements in the longer term and again making earnings more predictable as transaction fees are fixed. A change in capital allocation should be required as used car market investment and revamped workshops for EV servicing will be needed. The changes may finally be a catalyst for starting to reduce the cyclical discount applied to car retailers by the market especially given the improved performances of the larger dealership groups through the last two major downturns of the financial crisis and the ongoing COVID-19 pandemic.

Recent market transactions imply that there is potentially significant value to be crystallised in the sector.

Applying our normal capped DCF valuation whereby we use a forecast period of six years, then cap terminal growth at zero with normalised working capital and capex/depreciation returns a value of 132p per share currently. Historically, we would have applied a discount to this to reflect cyclicality but should the cash flow performance become more stable under the new strategy we would expect that level to be more attainable. The sensitivity to WACC and the terminal growth rate of our DCF calculation is shown in the table below.

Exhibit 2: Capped DCF sensitivity analysis to WACC and terminal growth rate (p/share)

WACC

6.0%

7.0%

7.9%

8.0%

9.0%

10.0%

Terminal growth rate

0%

210

163

132

128

101

80

1%

212

165

133

129

102

81

2%

215

167

135

131

104

82

3%

217

168

137

133

105

83

Source: Edison Investment Research estimates

The capital allocation policy of the group should allow selective M&A to support the new strategy as well as the resumption of dividend payments to shareholders. Management has indicated it expects to make a payment for FY21 when it announces results on 13 April 2022.


Exhibit 3: Financial summary

£m

2019

2020

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,806.5

3,699.9

4,330.9

4,528.0

Cost of Sales

(4,293.4)

(3,288.9)

(3,803.4)

(4,020.9)

Gross Profit

513.1

411.0

527.4

507.1

EBITDA

 

 

95.3

99.0

180.6

150.4

Operating Profit (before amort. and except.)

 

 

43.0

47.8

120.7

86.4

Intangible Amortisation

(6.1)

(4.8)

(5.4)

(5.4)

Exceptionals

(49.7)

(12.1)

0.4

0.0

Other

(2.3)

(1.6)

(1.5)

(1.5)

Operating Profit

(15.1)

29.3

114.2

79.6

Net Interest

(24.3)

(21.2)

(22.0)

(22.3)

Profit Before Tax (norm)

 

 

4.0

14.1

86.0

51.4

Profit Before Tax (FRS 3)

 

 

(45.7)

2.0

86.4

51.4

Tax

3.9

(6.1)

(16.4)

(9.8)

Profit After Tax (norm)

3.2

11.4

69.6

41.7

Profit After Tax (FRS 3)

(41.8)

(4.1)

70.0

41.7

Average Number of Shares Outstanding (m)

389.2

390.1

391.0

391.8

EPS (p)

 

 

0.82

2.92

17.81

10.63

EPS - normalised fully diluted (p)

 

 

0.81

2.92

17.36

10.36

EPS - (IFRS) (p)

 

 

(10.74)

(1.05)

17.89

10.63

Dividend per share (p)

1.48

0.00

2.00

3.30

Gross Margin (%)

10.7

11.1

12.2

11.2

EBITDA Margin (%)

2.0

2.7

4.2

3.3

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

0.9

1.3

2.8

1.9

BALANCE SHEET

Fixed Assets

 

 

744.3

707.6

695.1

692.6

Intangible Assets

196.1

190.1

188.7

193.4

Tangible Assets

429.2

399.9

392.6

388.6

Right of use asset

119.0

117.6

113.8

110.7

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

1,326.9

1,067.0

1,239.4

1,351.5

Stocks

956.5

655.2

779.6

860.3

Debtors

200.3

154.7

180.4

190.9

Cash

150.3

243.0

263.0

283.0

Other

19.8

14.1

16.5

17.3

Current Liabilities

 

 

(1,380.9)

(1,028.7)

(1,039.8)

(1,076.3)

Creditors

(1,261.5)

(911.8)

(1,039.8)

(1,076.3)

Short term borrowings

(119.4)

(116.9)

0.0

0.0

Long Term Liabilities

 

 

(379.7)

(463.5)

(550.2)

(594.6)

Long term borrowings

(90.4)

(166.8)

(254.5)

(299.9)

Lease liabilities

(146.9)

(144.4)

(144.4)

(144.4)

Other long term liabilities

(142.4)

(152.3)

(151.3)

(150.3)

Net Assets

 

 

310.6

282.4

344.5

373.2

CASH FLOW

Operating Cash Flow

 

 

93.5

68.2

107.7

53.5

Net Interest

(18.4)

(24.3)

(21.2)

(22.0)

Tax

3.9

(6.1)

(16.4)

(9.8)

Capex

(53.7)

(16.8)

(21.3)

(34.9)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Financing

0.1

0.0

0.0

0.0

Dividends

(15.9)

0.0

0.0

(12.1)

Other

16.9

(2.2)

0.4

0.0

Net Cash Flow

26.4

18.8

49.2

(25.4)

Opening net debt/(cash)

 

 

85.9

59.5

40.7

(8.5)

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)

 

 

59.5

40.7

(8.5)

16.9

Net financial Liabilities

206.4

185.1

135.9

161.3

Source: Company reports; Edison Investment Research estimates


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This report has been commissioned by Lookers and prepared and issued by Edison, in consideration of a fee payable by Lookers. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

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This report has been commissioned by Lookers and prepared and issued by Edison, in consideration of a fee payable by Lookers. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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