Lookers PLC FY results, good DPS beat

Zeus Capital

Lookers PLC (LON:LOOK) has delivered a solid set of FY results, with adjusted EPS coming in 1% ahead of our forecast at the adjusted EPS level. The dividend also beat our forecast by 7% and was +17% YOY indicating its confidence for the future. Net debt was higher than we anticipated, albeit the balance sheet remains strong with net debt/EBITDA running at 0.6x following the parts disposal. The trading outlook remains robust, with the new car order book for March progressing well. We are maintaining our cautious forecast assumptions for now, and believe the valuation remains undemanding given the high level of execution we have seen to date.

FY results: Lookers have delivered a solid set of results, which are again at record levels for the eighth successive year, with adjusted PBT more than double that delivered in 2012. Revenues were +17% YOY and 15% ahead of our forecast, with gross profit of £504.2m ahead of our forecast of £485.4m. The gross margin did fall 60bps YOY to 11.8% to reflect the changing mix of the business towards new cars. Adjusted EBIT (ex share based payments, debt issue costs and pension costs) was 0.7% ahead of our forecast at £94.7m with margins -20bps YOY. Interest costs were higher than our forecast of £16.0m at £17.6m due to higher levels of working capital, with adjusted PBT coming in 1% below our forecast at £77.1m (ZC £78.0m). Adjusted EPS was 1% ahead of our forecast due to a lower tax charge, and was +4% YOY. The dividend was +7% ahead of our forecast at 3.6p and +17% YOY reflecting its confidence in the future. Net debt at £74.1m was higher than our forecast of £42.9m due to working capital and new acquisition related debt. That said, the balance sheet remains strong with net debt/EBITDA running at 0.6x.

Key themes – New car revenue was +20% YOY or +10% on a LFL basis, with fleet a big driver behind this and +16% or +13% on a LFL basis. The Group has put more focus into this business and careful not to take low margin business. Gross profit from new cars was +11% YOY showing good pricing discipline. Management are more optimistic than most on the new car market, and expect this to be flat YOY albeit do not comment on profitability. Used cars also remained strong and was +19% in revenue terms of +7% on a LFL basis with gross profit increasing +17% or +7% on a LFL basis. We view this as a very strong performance given the pace of growth of this business during the last 4 years. Aftersales saw gross profits +18% YOY or +9% on a LFL basis, with margins flat YOY, which we believe bodes well for the near-term profitability of the Group.

Forecasts – We reduced our forecasts last year to reflect the impact of the Parts disposal, and made a further downgrade in November in line with our sector thesis assuming a 10% fall in new car sales coupled with cost pressures. We are maintaining our forecast assumptions for now, and are likely to remain at the bottom end of the consensus range this morning.

Investment view: As with the rest of the sector, the Lookers PLC valuation is undemanding, trading on a 2017E P/E of sub 10x based on cautious assumptions and an EV/EBITDA of 5.7x. Our underlying forecasts could well prove to be too conservative, and we would also expect management to look at acquisitions this year given its strong balance sheet providing such opportunities can hit its hurdle rates.

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