Piercing the gloom

Lookers 13 November 2017 Update
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Lookers

Piercing the gloom

Q3 trading update

Automotive retailers

13 November 2017

Price

100.00p

Market cap

£397m

Net debt (£m) at 30 June 2017

61.9

Shares in issue

397.2m

Free float

80%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.7)

(8.1)

(6.1)

Rel (local)

(8.4)

(8.1)

(14.3)

52-week high/low

131.0p

98.0p

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 events

FY17

March 2018

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 issued a Q3 trading statement that reaffirmed management expectations for 2017. It also indicated the initiation of a share buyback programme, as in the absence of any immediate M&A opportunities the recent fall in the share price has made the returns compelling from such an allocation of capital. Clearly, new car sales in the UK are persistently lower year-on-year, with confidence declines among consumers and businesses taking their toll. However, the strength of higher-margin used car demand and aftermarket sales continue to deliver a positive mix. Overall, the rating appears undemanding and the yield attractive.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15**

3,430

59.6

12.4

3.12

8.1

3.1

12/16**

4,088

64.9

13.1

3.64

7.6

3.6

12/17e

4,575

73.0

14.7

4.00

6.8

4.0

12/18e

4,654

73.6

14.8

4.20

6.8

4.2

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles and exceptional items. Note: **Continuing operations only.

Robust used and aftersales development

Unlike some of its peers, Lookers does not appear to be seeing any undue read across from weaker new car sales to its used car activities. In addition, the growth of service operations continues to reflect the growth in the overall UK vehicle parc driven by strong markets in recent years. SMMT figures showed continued sharp declines in new car and van sales in October as confidence continued to wane. However, Lookers continues to outperform the new car market and is still displaying strong growth in its higher-margin used and aftersales businesses in H217, which between them account for almost two-thirds of gross profit,

Share buyback to be initiated

Management also indicated that it is to launch a share buyback programme, although the scale and details have yet to be published. While the company clearly considers organic investment and focused acquisitions as being the preferred use of available capital, the current share price level makes this a compelling alternative. However, an upper limit on the buyback price will be set to ensure investment returns remain above predetermined levels.

Valuation: Discounting considerable turmoil

We have reduced our EPS by 4% and 6% for FY17 and FY18, respectively, to reflect softer new car volumes, but even so the recent price weakness in response to a peer’s woes seems unwarranted. The market is correct to be concerned about developments in new car markets. However, in our view, sentiment seems to be underplaying the supportive economic fundamentals and business trends for the higher-margin businesses, while prioritising confidence-eroding issues that have yet to prove significant. With Lookers management adding to the cash returns for shareholders, the current rating appears both undemanding and discounting a lot of as yet unseen turbulence.

Q3 trading performance

Lookers has issued its Q3 trading statement as usual, indicating trading performance aligned with previous management expectations for 2017. The new car market continues to be influenced by domestic political uncertainty that is increasingly affecting confidence among consumers and businesses. It is exacerbated by the continuing concerns surrounding the use of personal contract plans (PCPs) and emissions, especially for diesel. While the latter should be largely a matter of substitution in the short term, it is clearly disruptive as cars are produced in advance of sales. In terms of the PCP debt issue, we are not convinced that the worries over debt levels warrant the level of concern that has arisen. The larger dealerships such as Lookers tend to be supplying better rated consumers, with credit checks systematically applied. The contracts are relatively short term in duration and have fixed levels of affordability, and the retailers are not providing the finance backing or residual guarantees. Indeed the PCPs continue to generate strong and high-quality used car returns, while allowing the customer to commit proportionately less capital to new and nearly new car purchases. At present the high levels of employment may indicate some decisions are being deferred due to a lack of real income growth.

New car segment (35% of gross profit)

Revenues from new car sales increased by 10% in the first nine months, the same pace of growth as seen in the first half of the year. Like-for-like growth decelerated to 5% compared to 7% in H117, reflecting the progressive weakening of retail and fleet demand during the year. With the UK new car market down 9% in Q317, Lookers is clearly continuing to outperform. Acquisitions last year were made towards the end of the year so Q4 growth is likely to reflect the like-for-like year-to-date development. Gross margins have improved modestly year-on-year and gross profit growth of 15% (6% like-for-like) for the period compares to 16% (5% like-for-like) in H117. The margins and profit per unit metrics increased for both the retail and fleet subsegments.

Management also points to the supportive actions of key manufacturer partners who are reducing targets, increasing tactical incentives and aiding cost reduction initiatives designed to help mitigate the effect of lower volumes,

Used car segment (25% of gross profit)

Unlike some peers, Lookers has seen an acceleration of used car sales during the third quarter. Nine-month turnover in the segment increased by 24% (like-for-like +14%) compared to just 10% (7% like-for-like) at the half year, aided by strong lead generation. While gross margin was a little softer in Q3, gross profit for the nine months still rose 20% (12% like-for-like) compared to 23% (13% like-for-like) after six months. A new website launch at the beginning of 2018 is expected to continue the improvement in lead generation that has already been apparent.

Aftersales (40% of gross profit)

Sometimes overlooked in the debate on the sector that often reverts to new car markets, aftersales revenue development continues to benefit from the increased penetration of PCPs and service contracts on both new and used car markets as well as the increasing vehicle parc due to recent record levels of overall new car sales. Turnover for the nine months was up 11% compared to 14% after six months, with like-for-like growth maintained at 4%. Gross profits rose 15% (6% like-for-like) compared to 16% in H1 17 (+7% like-for-like). Given gross margins of around 45%, this represents a continued healthy additional element of earnings and cash flow growth. Even with the market flattening off, overall car sales will still be at historically high levels of around 2.5m to 2.6m in 2017, driving continued car parc growth next year.

Earnings revisions

We have reduced our expectations for new car sales through the final quarter and for 2018, reflecting the persistent weakness currently being experienced in the new car market. We have also slightly reduced our anticipated growth rate for aftersales to reflect the level of activity through the first nine months. The changes are reflected in Exhibit 1 below.

Exhibit 1: Financial summary

Year to December (£m)

2017e

2018e

 

Prior

New

% change

Prior

New

% change

New

2,488.3

2,370.7

(4.7)

2,538.1

2,323.3

(8.5)

Used

1,718.2

1,718.2

0.0

1,842.8

1,821.3

(1.2)

Aftersales

405.5

398.2

(1.8)

424.1

414.1

(2.4)

Leasing

88.0

88.0

 

95.0

95.0

 

Sales

4,700.0

4,575.1

(2.7)

4,900.0

4,653.8

(5.0)

 

 

 

 

 

 

EBITDA

108.7

105.2

(3.2)

111.2

105.5

(5.1)

 

 

 

 

 

 

Underlying EBITA

91.6

88.6

(100.0)

93.8

89.0

(5.1)

 

 

 

 

 

 

Underlying PBT

76.0

73.0

(4.0)

78.5

73.6

(6.2)

 

 

 

 

 

 

EPS - underlying continuing (p)

15.3

14.7

(4.0)

15.8

14.8

(6.3)

DPS (p)

4.0

4.0

0.0

4.2

4.2

0.0

Source: Company reports, Edison Investment Research estimates


Exhibit 2: Financial summary

£m

2015*

2016*

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

3,430.3

4,088.2

4,575.1

4,653.8

Cost of Sales

(3,039.6)

(3,638.7)

(4,035.3)

(4,104.6)

Gross Profit

390.7

449.5

539.9

549.1

EBITDA

 

84.4

97.6

105.2

105.5

Operating Profit (before amort. and except.)

 

73.4

82.5

88.6

89.0

Intangible Amortisation

0.0

0.0

0.0

0.0

Exceptionals

(9.3)

14.7

(11.1)

(11.3)

Other

0.0

0.0

0.0

0.0

Operating Profit

64.1

97.2

77.5

77.7

Net Interest

(13.8)

(17.6)

(15.7)

(15.5)

Profit Before Tax (norm)

 

59.6

64.9

73.0

73.6

Profit Before Tax (FRS 3)

 

50.3

79.6

61.9

62.2

Tax

(9.4)

(7.9)

(12.5)

(12.6)

Profit After Tax (norm)

50.2

53.3

59.8

60.3

Profit After Tax (FRS 3)

40.9

71.7

49.4

49.7

Average Number of Shares Outstanding (m)

394.4

396.4

396.9

396.9

EPS - normalised (p)

 

12.7

13.4

15.1

15.2

EPS - normalised fully diluted (p)

 

12.44

13.13

14.7

14.8

EPS - (IFRS) (p)

 

10.4

18.1

12.4

12.5

Dividend per share (p)

3.1

3.6

4.0

4.2

Gross Margin (%)

11.4

11.0

11.8

11.8

EBITDA Margin (%)

2.5

2.4

2.3

2.3

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

2.1

2.0

1.9

1.9

BALANCE SHEET

Fixed Assets

 

441.2

536.5

563.7

585.3

Intangible Assets

158.3

217.4

221.8

221.0

Tangible Assets

282.9

319.1

341.9

364.3

Investments

0.0

0.0

0.0

0.0

Current Assets

 

1,143.9

1,171.3

1,246.6

1,263.8

Stocks

816.0

839.4

869.3

866.5

Debtors

319.6

292.1

317.5

327.5

Cash

8.3

39.8

59.8

69.8

Other

0.0

0.0

0.0

0.0

Current Liabilities

 

(1,085.4)

(1,130.3)

(1,163.6)

(1,172.0)

Creditors

(1,002.0)

(1,105.2)

(1,163.6)

(1,172.0)

Short term borrowings

(83.4)

(25.1)

0.0

0.0

Long Term Liabilities

 

(201.9)

(235.8)

(271.5)

(269.0)

Long term borrowings

(86.6)

(88.8)

(122.8)

(118.6)

Other long term liabilities

(115.3)

(147.0)

(148.7)

(150.4)

Net Assets

 

297.8

341.7

375.2

408.2

CASH FLOW

Operating Cash Flow

 

32.9

130.5

105.6

102.6

Net Interest

0.0

(13.8)

(17.6)

(15.7)

Tax

0.0

(17.3)

(12.5)

(12.6)

Capex

(36.0)

(45.5)

(49.4)

(43.9)

Acquisitions/disposals

(104.4)

18.9

0.0

0.0

Financing

0.9

0.0

0.0

0.0

Dividends

(11.6)

(13.2)

(15.1)

(16.2)

Other

8.4

28.0

0.0

0.0

Net Cash Flow

(109.8)

87.6

11.1

14.3

Opening net debt/(cash)

 

51.9

161.7

74.1

63.0

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)

 

161.7

74.1

63.0

48.8

Source: Lookers reports, Edison Investment Research estimates. Note: *Continuing operations only.

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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 12, 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 12, 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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 12, 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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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