Still firmly on course

Lookers 11 November 2016 Update

Lookers

Still firmly on course

Q316 trading update

Retail (automotive)

11 November 2016

Price

108.0p

Market cap

£428m

Net debt (£m) at 30 June 2016

74.9

Shares in issue

396.2m

Free float

80%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.2)

(9.6)

(38.4)

Rel (local)

3.3

(9.2)

(42.9)

52-week high/low

185.0p

92.5p

Business description

Lookers is a leading UK motor vehicle and specialist parts distributor. It now operates more than 165 franchises, representing 33 marques spread across the UK, with strong regional presences in Northern Ireland, Scotland and the South East and across Northern England.

Next events

Pre-close update

January 2017

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Lookers is a research client of Edison Investment Research Limited

Lookers’ Q3 trading update confirms trading is on course to meet market expectations. The disposal of the Parts division has completed at £120m, with £82m of the proceeds used for new acquisitions. While market fears have caused a c 40% price drop against 12-month highs for the sector, we think Lookers’ nominal discount to peers on CY16 P/E rating is unjustified given its sound trading record and earnings growth potential.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

3,043

65.0

13.21

2.84

8.2

2.6

12/15

3,649

72.1

14.88

3.12

7.3

2.9

12/16e

4,250

78.0

15.90

3.50

6.8

3.2

12/17e

4,650

78.0

15.90

3.70

6.8

3.4

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

A busy nine months

Lookers’ Q3 update confirms the fundamental corporate developments of recent weeks and reaffirms that trading is in line with management expectations. The Parts division has been sold for £120m, with £82m of the proceeds reinvested in seven Mercedes Benz/Smart and three BMW/MINI franchises across the West Midlands; the group has also exited three operations that offer limited scope. Trading conditions remain sound and, although new car retail margins remain under some pressure, new car fleet, used car and aftermarket returns all show like-for-like revenue growth, generated at slightly increased margins. While recent sterling weakness ought, in theory, to make trading more difficult, most OEMs have resisted the temptation to raise prices. The impact of the earnings dilutive disposal has prompted us to edge our FY16 and FY17 underlying PBT estimates down from £80m to £78m, although current trading remains in line with earlier expectations.

Strategy continues to deliver

The straightforward strategy of delivering organic and acquisition based growth looks set to continue. Lookers has a strong record of delivering consistent EPS growth in a fragmented, but mature market. The group has developed clearly defined territories with its chosen OEM partners, building the used car and aftermarket operations within each franchise to reduce the potential impact of the vagaries of the retail new car market. We believe that the industry dynamics favour the larger groups, because of their more effective internet presence and the ability to finance modern facilities and to respond quickly to market opportunities.

Valuation: Quality in an unloved sector

Share prices of UK motor dealership groups are, on average, 38% below their 12-month highs, reflecting fears about consumer spending and the impact of weak sterling on new car prices. However, consensus estimates for Lookers still indicate record profits in 2016 and 2017. A CY16 P/E rating below the sector average (6.8x vs 6.9x) appears unjustified given its impressive long-term earnings growth record and financial strength to respond quickly to opportunities amid challenging market conditions.

Financial summary

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

4,250

4,650

Cost of Sales

(1,623.2)

(1,645.9)

(1,753.3)

(2,128.7)

(2,646.8)

(3,196.9)

(3,750.0)

(4,100.0)

Gross Profit

260.6

252.6

303.3

335.8

396.1

452.2

500.0

550.0

EBITDA

 

54.7

54.5

60.0

67.7

87.0

99.6

113.0

113.5

Operating Profit (pre amortisation and except.)

 

46.9

45.2

49.2

58.4

76.6

85.9

96.0

94.5

Intangible Amortisation

(1.3)

(1.3)

(1.1)

(1.1)

(1.2)

(1.6)

(2.0)

(2.1)

Exceptionals

0.0

0.0

0.0

0.0

0.0

(1.9)

30.0

0.0

Other

(1.2)

(1.1)

(2.6)

(3.1)

(3.5)

(4.3)

(3.0)

(3.0)

Operating Profit

44.4

42.8

45.5

54.2

71.9

78.1

121.0

89.4

Net Interest

(13.3)

(11.4)

(11.2)

(10.3)

(11.6)

(13.8)

(18.0)

(16.5)

Profit Before Tax (norm)

 

33.6

33.8

38.0

48.1

65.0

72.1

78.0

78.0

Profit Before Tax (FRS 3)

 

31.1

31.4

34.3

43.9

60.3

64.3

103.0

72.9

Tax

(8.2)

(6.2)

(8.0)

(7.7)

(12.4)

(12.0)

(13.5)

(13.5)

Profit After Tax (norm)

 

25.4

27.6

30.0

40.4

52.6

60.1

64.5

64.5

Profit After Tax (FRS 3)

 

22.9

25.2

26.3

36.2

47.9

52.3

89.5

59.4

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

16.28

16.28

EPS - normalised fully diluted (p)

 

6.49

7.02

7.56

10.16

13.21

14.88

15.90

15.90

EPS - FRS 3 (p)

 

5.97

6.57

6.77

9.28

12.31

13.26

22.59

14.99

Dividend per share (p)

1.80

2.18

2.35

2.58

2.84

3.12

3.50

3.70

Gross Margin (%)

13.8%

13.3%

14.7%

13.6%

13.0%

12.4%

11.8%

11.8%

EBITDA Margin (%)

2.9%

2.9%

2.9%

2.7%

2.9%

2.7%

2.7%

2.4%

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

2.5%

2.4%

2.4%

2.4%

2.5%

2.4%

2.3%

2.0%

BALANCE SHEET

Fixed Assets

 

255.1

253.3

273.3

292.1

329.8

441.2

474.8

475.8

Intangible Assets

60.5

62.2

76.2

87.5

114.2

158.3

212.9

210.9

Tangible Assets

194.6

191.1

197.1

204.6

215.6

282.9

261.9

264.9

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

1,406.8

1,513.2

Stocks

292.3

349.6

423.5

499.6

605.9

883.0

968.5

1,026.9

Debtors

104.2

109.1

123.8

154.0

179.4

252.6

360.0

383.0

Cash

24.3

17.9

8.7

5.2

5.9

8.3

78.3

103.3

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)

(1,295.8)

(1,369.7)

Creditors/Other

(372.9)

(424.9)

(497.3)

(595.8)

(705.0)

(1,002.0)

(1,252.2)

(1,314.1)

Short term borrowings

(14.1)

(8.6)

(15.7)

(14.5)

(20.2)

(83.4)

(43.6)

(55.6)

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

406.2

447.7

CASH FLOW

Operating Cash Flow

 

49.3

40.8

48.4

55.9

55.1

58.0

118.0

90.1

Net Interest

(13.2)

(11.4)

(12.4)

(10.3)

(11.6)

(13.8)

(18.0)

(16.5)

Tax

(5.9)

(6.7)

(7.8)

(8.1)

(8.9)

(11.3)

(13.1)

(13.5)

Net Capex

(5.3)

1.5

(11.6)

(3.8)

(10.0)

(28.0)

(10.0)

(25.0)

Acquisitions/disposals

0.0

0.2

(17.4)

(19.3)

(24.5)

(104.4)

55.8

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)

(12.9)

(14.1)

Net Cash Flow

 

22.6

17.1

(8.7)

5.1

(8.8)

(109.8)

119.8

21.0

Opening net debt/(cash)

 

79.2

56.6

39.5

48.2

43.1

51.9

161.7

41.9

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

41.9

20.9

Source: Lookers accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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 2016. “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

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

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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 2016. “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

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

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

Share this with friends and colleagues