Last week Lookers plc (LOOK) announced a record set of H1 results for the six months to 30 June 2021. Underlying PBT was £50.3m, versus an underlying loss of £36.5m in H1 2020. This stronger trading, coupled with cost control and working capital initiatives, has led to substantial cash generation. Lookers has gone from net debt of £40.7m (excl. leases) at the FY20 year end to net cash of £33.0m at 30 June 2021. With legacy issues now behind them, good evidence of trading outperformance and a strong balance sheet, we think the shares should start to re-rate from here and continue to see significant long term valuation upside from here.
- H1 results summary: Lookers announced a record set of H1 results, achieving underlying PBT of £50.3m in a period that was affected by three months of lockdowns. In the period, adjustments to PBT were minimal. There was a £0.4m deduction in H1 2021 (relating to gains on property disposals), compared to £13.9m of add-backs in H1 2020. This indicates a clean set of results and that the restructuring of the Group is largely complete. The company has voluntarily opted to repay the furlough support from H1 2021 by the end of FY21. In H1 2021, there was a positive movement of £73.7m in net debt/cash, putting the company in a £33.0m net cash position at 30 June 2021 with property assets amounting to 78p per share.
- Margin expansion: New retail sales (+47.9% LfL) outperformed the market by 17.4 ppt and used car unit sales (+38.3% LfL) outperformed the wider market by 5.0 ppt. We see this as a sign that the Group’s improved omnichannel offering and 14-day money-back guarantee is attracting customers. It is also clear to us that the Group is now able to focus on improving the core business as legacy issues pass away. Overall gross margins in H1 2021 increased by 162 bps versus H1 2020 reflecting improvements across the board albeit skewed by used cars as anticipated.
- Forecasts: We have increased our gross margin assumptions in FY21 to reflect the exceptionally strong trading conditions in the used car market. We have also updated our balance sheet and cash flow assumptions to put the Group in a net cash (excl. leases) position by the end of FY21. Lower debt balances and higher cash has reduced our net interest expense forecasts. We have increased underlying operating costs to reflect the repayment of the CJRS grants and staff cost pressures. There are minimal changes to headline forecasts.
- Investment view: Lookers now trades at a P/E ratio of only 5.5x FY21 and 6.2x FY22, based on our forecasts. We observe low ratings across the sector, as share prices have not kept pace with earnings upgrades. The sector has historically traded at 8.0x-14.0x PE. Applying a conservative 10.0x multiple to our forecast FY22 earnings gives a value of 109p.