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Market capitalisation
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Research: Industrials
Lookers
Written by
Lookers |
Adverse reaction hard to justify |
Interim results preview |
Retail (automotive) |
6 July 2016 |
Share price performance
Business description
Next events
Analysts
Lookers is a research client of Edison Investment Research Limited |
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A weak share price reflects fears about a post-Brexit economy rather than current trading, which remains on course. The challenge may again be formidable, but there are opportunities that a strong management team can use to demonstrate the quality of the group’s earnings.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
3,043 |
65.0 |
13.21 |
2.84 |
7.6 |
2.8 |
12/15 |
3,649 |
72.1 |
14.88 |
3.12 |
6.8 |
3.1 |
12/16e |
4,150 |
80.0 |
16.14 |
3.25 |
6.2 |
3.2 |
12/17e |
4,300 |
83.0 |
16.71 |
3.40 |
6.0 |
3.4 |
Note: * PBT and EPS are normalised and diluted, before intangibles amortisation, debt issue costs, share based payments, pension costs and exceptional items.
Another good half-year expected
The vibes for the first half of 2016 are positive: new car registrations were up by 4.1%, including 3.2% in retail, over the first five months of the year; the used car market is indicated also to be slightly better; the aftermarket, especially in the 0-3 year-old segment, is also usefully higher. Lookers’ May trading statement reported Q1 gross profits in these segments of the business to be ahead by 23%, 23% and 25%, respectively. While these figures are inflated by the impact of last year’s £85m Benfield Motors acquisition, the 5% rise in like-for-like gross profits is a useful guide for performance. The Parts division also reported steady progress, despite ongoing challenging conditions. Interim results, due to be announced in mid-August, should show sound progress. To be on course to deliver our full-year estimates, we look for H116 revenue of £2.2bn, with underlying PBT up by some 12.5% to £48.5m.
Industry dynamics remain favourable
We have, for some time, indicated industry dynamics favouring the larger groups. The franchised dealership market remains fragmented (Lookers is a top three player with a 3.4% share); many smaller businesses struggle to meet the expectations of the OEMs in terms of upgrading facilities, while few can match the internet presence of the larger groups supporting their used car and aftermarket operations. The UK motor market is mature, with new vehicle registrations peaking last year at levels little different from the previous record, back in 2003. Over this period, Lookers has delivered 9.2% CAGR in diluted EPS, including record profits in each of the past seven years. Brexit offers more new challenges (new car registration forecasts have been reduced), but we are confident of the group’s ability to continue growing consistently over the medium term.
Valuation: Sector qualities not recognised
The Lookers share price is down by 39% from its 12 month high and by 25% since the Brexit vote – similar movements have been seen in other motor retail stocks. The prospective rating for CY16 is slightly below the sector average (P/E 6.2x vs 7.5x) and 44% below that of the FTSE All-Share General Retailers Index (12.6x); this discount ignores the resilience shown during previous recessions and the potential from recent investments.
Exhibit 1: Financial summary
Year end 31 December |
£m |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016e |
2017e |
Accounting basis |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|||||||||
Revenue |
|
1,884 |
1,899 |
2,057 |
2,465 |
3,043 |
3,649 |
4,150 |
4,300 |
Cost of Sales |
(1,623.2) |
(1,645.9) |
(1,753.3) |
(2,128.7) |
(2,646.8) |
(3,196.9) |
(3,645.0) |
(3,775.0) |
|
Gross Profit |
260.6 |
252.6 |
303.3 |
335.8 |
396.1 |
452.2 |
505.0 |
525.0 |
|
EBITDA |
|
54.7 |
54.5 |
60.0 |
67.7 |
87.0 |
99.6 |
109.5 |
112.5 |
Operating Profit (pre amortisation and except.) |
|
46.9 |
45.2 |
49.2 |
58.4 |
76.6 |
85.9 |
95.0 |
97.5 |
Intangible Amortisation |
(1.3) |
(1.3) |
(1.1) |
(1.1) |
(1.2) |
(1.6) |
(1.6) |
(1.6) |
|
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
(1.9) |
0.0 |
0.0 |
|
Other |
(1.2) |
(1.1) |
(2.6) |
(3.1) |
(3.5) |
(4.3) |
(4.3) |
(4.3) |
|
Operating Profit |
44.4 |
42.8 |
45.5 |
54.2 |
71.9 |
78.1 |
89.1 |
91.6 |
|
Net Interest |
(13.3) |
(11.4) |
(11.2) |
(10.3) |
(11.6) |
(13.8) |
(15.0) |
(14.5) |
|
Profit Before Tax (norm) |
|
33.6 |
33.8 |
38.0 |
48.1 |
65.0 |
72.1 |
80.0 |
83.0 |
Profit Before Tax (FRS 3) |
|
31.1 |
31.4 |
34.3 |
43.9 |
60.3 |
64.3 |
74.1 |
77.1 |
Tax |
(8.2) |
(6.2) |
(8.0) |
(7.7) |
(12.4) |
(12.0) |
(14.5) |
(15.2) |
|
Profit After Tax (norm) |
|
25.4 |
27.6 |
30.0 |
40.4 |
52.6 |
60.1 |
65.5 |
67.8 |
Profit After Tax (FRS 3) |
|
22.9 |
25.2 |
26.3 |
36.2 |
47.9 |
52.3 |
59.6 |
61.9 |
Average Number of Shares Outstanding (m) |
383.5 |
383.8 |
387.1 |
388.1 |
389.2 |
394.4 |
396.2 |
396.2 |
|
EPS - normalised (p) |
|
6.62 |
7.19 |
7.72 |
10.36 |
13.52 |
15.24 |
16.53 |
17.11 |
EPS - normalised fully diluted (p) |
|
6.49 |
7.02 |
7.56 |
10.16 |
13.21 |
14.88 |
16.14 |
16.71 |
EPS - FRS 3 (p) |
|
5.97 |
6.57 |
6.77 |
9.28 |
12.31 |
13.26 |
15.04 |
15.62 |
Dividend per share (p) |
1.80 |
2.18 |
2.35 |
2.58 |
2.84 |
3.12 |
3.25 |
3.40 |
|
Gross Margin (%) |
13.8% |
13.3% |
14.7% |
13.6% |
13.0% |
12.4% |
12.2% |
12.2% |
|
EBITDA Margin (%) |
2.9% |
2.9% |
2.9% |
2.7% |
2.9% |
2.7% |
2.6% |
2.6% |
|
Operating Margin (before GW and except.) (%) |
2.5% |
2.4% |
2.4% |
2.4% |
2.5% |
2.4% |
2.3% |
2.3% |
|
BALANCE SHEET |
|||||||||
Fixed Assets |
|
255.1 |
253.3 |
273.3 |
292.1 |
329.8 |
441.2 |
447.1 |
452.5 |
Intangible Assets |
60.5 |
62.2 |
76.2 |
87.5 |
114.2 |
158.3 |
156.7 |
155.1 |
|
Tangible Assets |
194.6 |
191.1 |
197.1 |
204.6 |
215.6 |
282.9 |
290.4 |
297.4 |
|
Investment in associates |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Current Assets |
|
428.6 |
480.1 |
559.2 |
659.3 |
791.2 |
1,143.9 |
1,200.7 |
1,260.3 |
Stocks |
292.3 |
349.6 |
423.5 |
499.6 |
605.9 |
883.0 |
927.2 |
973.5 |
|
Debtors |
104.2 |
109.1 |
123.8 |
154.0 |
179.4 |
252.6 |
265.2 |
278.5 |
|
Cash |
24.3 |
17.9 |
8.7 |
5.2 |
5.9 |
8.3 |
8.3 |
8.3 |
|
Other |
7.8 |
3.5 |
3.2 |
0.5 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Current Liabilities |
|
(387.0) |
(433.5) |
(513.0) |
(610.3) |
(725.2) |
(1,085.4) |
(1,095.6) |
(1,122.4) |
Creditors/Other |
(372.9) |
(424.9) |
(497.3) |
(595.8) |
(705.0) |
(1,002.0) |
(1,052.0) |
(1,104.1) |
|
Short term borrowings |
(14.1) |
(8.6) |
(15.7) |
(14.5) |
(20.2) |
(83.4) |
(43.6) |
(18.3) |
|
Long Term Liabilities |
|
(115.1) |
(102.8) |
(115.7) |
(113.1) |
(138.9) |
(201.9) |
(179.6) |
(171.6) |
Long term borrowings |
(66.8) |
(48.8) |
(41.2) |
(33.8) |
(37.6) |
(86.6) |
(76.6) |
(68.6) |
|
Other long term liabilities |
(48.3) |
(54.0) |
(74.5) |
(79.3) |
(101.3) |
(115.3) |
(103.0) |
(103.0) |
|
Net Assets |
|
181.6 |
197.1 |
203.8 |
228.0 |
256.9 |
297.8 |
372.6 |
418.8 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
49.3 |
40.8 |
48.4 |
55.9 |
55.1 |
58.0 |
98.2 |
100.9 |
Net Interest |
(13.2) |
(11.4) |
(12.4) |
(10.3) |
(11.6) |
(13.8) |
(15.0) |
(14.5) |
|
Tax |
(5.9) |
(6.7) |
(7.8) |
(8.1) |
(8.9) |
(11.3) |
(13.9) |
(15.0) |
|
Net Capex |
(5.3) |
1.5 |
(11.6) |
(3.8) |
(10.0) |
(28.0) |
(25.0) |
(25.0) |
|
Acquisitions/disposals |
0.0 |
0.2 |
(17.4) |
(19.3) |
(24.5) |
(104.4) |
18.0 |
0.0 |
|
Financing |
0.0 |
1.5 |
0.4 |
0.3 |
1.6 |
0.9 |
0.0 |
0.0 |
|
Other |
0.0 |
(1.1) |
0.1 |
(0.1) |
(0.1) |
0.4 |
0.0 |
0.0 |
|
Dividends |
(2.3) |
(7.7) |
(8.4) |
(9.5) |
(10.4) |
(11.6) |
(12.5) |
(13.1) |
|
Net Cash Flow |
|
22.6 |
17.1 |
(8.7) |
5.1 |
(8.8) |
(109.8) |
49.8 |
33.3 |
Opening net debt/(cash) |
|
79.2 |
56.6 |
39.5 |
48.2 |
43.1 |
51.9 |
161.7 |
111.9 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Other |
0.0 |
(0.0) |
(0.0) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Closing net debt/(cash) |
|
56.6 |
39.5 |
48.2 |
43.1 |
51.9 |
161.7 |
111.9 |
78.6 |
Source: Lookers accounts, Edison Investment Research
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