Lookers: Another 2021 upgrade

Cambria Automobiles

Lookers plc (LOOK) has announced a third upgrade to 2021 forecasts following stronger than expected trading so far this year. As a result, we are lifting our current year forecast for underlying PBT by 27.4% from £40.2m to £51.2m. We believe Lookers is on track to deliver EPS of 13.2p over the medium term, as set out in our note in February.

2020 results. Lookers formally announced its FY20 results, which were already well-flagged to the market. Revenue in 2020 dropped by 23.0% to £3.7bn, but underlying PBT increased from £5.4m to £15.5m (excl. share-based payments charges of £1.4m). The Group saw new car sales fall 23.3% (outperforming the market’s 29.4% decline) and used car sales fall 22.3% (underperforming the market’s 14.9% decline). Over the period, net debt (excluding IFRS 16 leases, vehicle rental lease liabilities and consignment/stocking loans) improved from £59.5m to £40.7m.

Trading outlook. Lookers has announced that trading in the first six months of 2021 has been exceptionally strong, underpinned by robust consumer demand, outperformance in UK new retail, strong margins in used cars, and cost savings. As such, Lookers has guided that results will be significantly ahead of expectations. We expect underlying PBT to exceed £35m in H1 2021.

Forecast changes. As a result of recent announcements and guidance, we have increased our FY21 underlying PBT forecast from £40.2m to £51.2m. We upgrade our revenue forecasts by 0.8%, but the main driver of this earnings increase is higher margins in used vehicles, caused by the exceptional increase in used car prices. This results in a 27.3% increase in our underlying EPS forecast to 10.5p.

Investment view. Based on our revised forecasts, Lookers is trading at 6.7x FY21 P/E, which drops to 6.4x in FY22. The group has substantially strengthened its balance sheet, moving from a net debt position of £40.7m at 31 December 2020 (company definition) to a net cash position as at 31 May 2021 (per recent RNS). Our forecast upgrades support our investment thesis that Lookers could achieve blue-sky EPS of 13.2p over the medium term. Applying P/E multiples of 8-14x to this amount indicates an undiscounted value range of 106-185p, suggesting long-term upside potential from today. Our DCF analysis, based on conservative assumptions such as a nil terminal growth rate, implies a value of 82.5p per share, which is 17.9% upside to the current price.

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Catalysts. Lookers has announced it will return to a more normal reporting schedule, with H1 2021 results due in September.

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