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Research: Industrials
Lookers’ shares remain suspended awaiting publication of the FY19 accounts. However, further extension of the audit scope means that expected completion before the end of August has again been deferred. Meanwhile, the company continues to trade as usual. Management has released a reasonably encouraging H120 update, which suggests that despite the legacy issues, the UK’s second largest automotive retailer has a reasonable chance of emerging into the market recovery later this year.
Written by
Lookers |
Operations recovering despite audit delays |
H120 trading update |
Automotive retail |
24 August 2020 |
Share price performance
Business description
Next events
Analyst
Lookers is a research client of Edison Investment Research Limited |
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Lookers’ shares remain suspended awaiting publication of the FY19 accounts. However, further extension of the audit scope means that expected completion before the end of August has again been deferred. Meanwhile, the company continues to trade as usual. Management has released a reasonably encouraging H120 update, which suggests that despite the legacy issues, the UK’s second largest automotive retailer has a reasonable chance of emerging into the market recovery later this year.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18** |
4,879.5 |
50.0 |
9.95 |
4.08 |
N/A |
N/A |
12/19e |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
12/20e |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
12/21e |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **May be restated.
Further deferral of FY19 accounts publication
Lookers is yet to release its FY19 report, which is further delayed by an extended audit, with the shares remaining suspended. Management has provided no expected date for publication following the latest delay. Prior years look likely to be restated, which may be partially responsible for the extension to the scope of audit. The fraud investigation is concluded and should lead to FY19 non-cash charges for the original issue, with other amounts relating to additional issues that were uncovered. Lookers still expects to report an underlying profit before tax for FY19.
COVID-19 affected H120 appears resilient
On a brighter note, the company has updated on H120 operational trading, where it has performed creditably. Given the disruption caused by the 10-week COVID showroom closures in England and Wales (longer in Scotland) and consequent revenue declines and margin pressures, it expects to report a material loss before tax for the period. Management expects to report H120 revenues of around £1.6bn (H119: £2.6bn). Government reliefs, support from brand partners and internal mitigation actions did prevent a worse outcome. Lookers has seen an improving trading environment since reopening in early June. There are likely to be several non-underlying charges, mainly related to an additional 12 site closures and 1,400 redundancy programme already announced. Adjusted net debt (excludes leases) benefited from the focus on cash protection and fell to just c £13.5m at H120.
H220 recovery apparent, outlook remains uncertain
In July, Lookers recorded a 17% increase in new and used unit sales year-on-year compared to the 11% year-on-year increase in new car sales in the UK market. With trading across Aftersales also ahead of expectations, H220 has started well as pent-up demand is being released across the market. However, the outlook for the end of the year and into 2021 remains very uncertain, with further potential disruptions from COVID, including local lockdowns, possible supply-side shortages due to factory and supply chain issues, as well as higher unemployment and Brexit.
Main issues
Fraud investigation
Grant Thornton delivered its report on the fraud issues on 3 August 2020. As previously announced, the key outcomes are expected to be:
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A non-cash charge of c £4m relating to FY19 with regard to the original investigation.
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Other unquantified non-cash charges in FY19 for additional irregularities that were uncovered during the course of the investigation.
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Restatement of prior year accounts for discrepancies found.
The aggregate non-cash charges applied to FY19 are still expected by the board to leave the company reporting an underlying profit before tax for FY19. Our last estimate was for £16m underlying PBT (published on 6 February 2020).
On 29 June 2020, an update was given that indicated cumulative total of around £15m of draft adjustments over and above the initial investigation that would apply to prior years up to and including FY19. These related to incorrect or inconsistent application of policies, processes and accounting standards.
Update on FY19 audit process
To some degree, those findings may have led to the extension of the scope of the audit announced on 20 August 2020, resulting in further work on the group’s corporate leasing and vehicle financing arrangements. As well as potentially affecting FY19, the additional work may require further restatement of prior year accounts. Management still expects FY19 to remain profitable at the underlying profit before tax level.
H120 trading
Highlights of H120 operational performance were as follows:
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During lockdown showrooms were shut from 23 March until 1 June 2020 in England, 8 June 2020 in Northern Ireland and 29 June 2020 in Scotland.
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Some aftersales activity was maintained to service vehicles for key workers.
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Management expects the impact of lockdown to reduce H120 sales by around £1–1.6bn.
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New car margins were also affected by reduced manufacturer volume bonus receipts, and used also saw margin pressure. Both were partially mitigated by cost savings and previous portfolio optimisation measures.
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Support of £29m was received from the government Coronavirus Job Retention Scheme (CJRS), which will diminish from H220 until the end of October when the scheme ends.
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Management expects to report a material underlying loss before tax for H120. There will be some additional non-underlying items in H120 as a result of the restructuring and optimisation initiatives.
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H120 adjusted net debt (excluding leases of over £100m) was approximately £13.5m, which benefited from VAT payment deferral, business rates holiday and support from brand partners. The property portfolio remains in excess of £300m.
On 4 June 2020, the company announced further restructuring and portfolio optimisation measures. It identified 1,400 redundancies, which should leave a workforce of 6,700 (-22%) by the end of Q320, saving around £50m of annual employment costs. It also marked 12 additional sites for closure (including seven freehold), leaving the company with a portfolio of surplus property available for disposal worth around £30m.
June like-for-like new car sales in England outperform the UK new car market which was down 34.9%. Like-for-like used car unit sales in England recorded year-on-year growth
H220 prospects
The positive trend seen in markets during June accelerated further in July as pent-up demand from lockdown was released in all business segments (new and used car sales and aftersales) on top of the recovery in the normal flow of activity.
In July, the group delivered more than 14,000 new retail and used vehicles, 17.0% higher on a like-for-like basis than in July 2019, and against a UK new car market that was up 11.3% year-on-year. Aftersales also delivered year-on-year revenue growth, as deferred service and MOT activity started to flow through workshops in addition to normal scheduled and ad hoc work.
Underlying profit before tax was materially ahead of July 2019.
Management says that the positive momentum has continued into August, with encouraging new car order levels ahead of the registration plate change in September.
The ability of manufacturers to meet the higher demand levels may be an issue due to factory and supply chain disruptions, and the impact of higher UK unemployment levels is likely to be more apparent from Q420.
We would expect Lookers to recover much of the H120 underlying loss before tax although, as some support initiatives unwind, the net debt level improvement seen at H120 may reverse significantly.
Uncertain outlook for FY21
The SMMT latest forecast in July for UK new car registrations indicates an expected 26.9% increase to just under 2.04m units, some 12% below the 2019 level. A lack of confidence in public transport may provide some additional support, but further COVID-related disruptions in the form of local lockdowns or supply disruptions cannot be discounted. With Brexit and increased unemployment levels also remaining issues, prospects for 2021 remain very uncertain, although Lookers has cut its costs in anticipation of lower markets, which should allow a significant improvement in H121 profit performance.
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Research: Healthcare
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