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Research: Industrials
Lookers
Written by
Lookers |
Still firmly on course |
Q316 trading update |
Retail (automotive) |
11 November 2016 |
Share price performance
Business description
Next events
Analysts
Lookers is a research client of Edison Investment Research Limited |
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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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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
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