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Lookers Plc

Lookers Plc Long Term Value

Lookers Plc (LON:LOOK) recently delivered a credible set of 2018A results which demonstrated the robust nature of the business model in a challenging market. We maintain our 2019E headline earnings assumptions for now, but take a more conservative view of 2020E earnings, with net debt forecasts higher due to a higher 2018 base. We continue to believe Lookers is well positioned, with a robust balance sheet and proven management team to deliver shareholders returns over the long term.

2018 results: The group delivered a solid set of 2018A results, achieving strong market outperformance across all three divisions with strong performances in particular in the used car and aftersales segments. In the context of significant trading headwinds including a challenging new car market, political uncertainty impacting consumer appetite and Brexit we view this as a credible performance. The dividend was a key positive and +5% YOY and ahead of our flat forecast expectations. We believe this shows confidence from management in its ability to generate cash as well as its strong balance sheet.

Key drivers: Lookers once again demonstrated its ability to capture profits in the used and aftersales part of the business to mitigate the impacts of both a weakened new car market and significant cost headwinds. We understand that there was above average “pre-registration” activity in Q3/4 as the impact of WLTP lasted longer than anticipated. This did have an effect on H2 margins, albeit we understand that the vast majority of excess stock has now been cleared into FY 2019.

Forecasts: We are maintaining our 2019E forecasts for now, but take a more conservative view of 2020E as a result of Brexit and the continued uncertainty in the market, we now expect adj. PBT in 2020E of £65.0m (vs £68.9m previously). We acknowledge there will be the cost allocation of intangibles to come as well as anticipated minimal changes from IFRS 16 to come following H1 results in August. Our forecasts at present reflect the underlying trading performance of the business, with no further property disposals anticipated during the period. We also introduce our 2021E forecasts for the first time, which assumes modest revenue growth on flat margins and is below the outturn delivered in 2015A and 2016A (c8.% and c.14% respectively at the adj. PBT level), which could well prove conservative.

Valuation: Based on our updated assumptions, the stock trades on below 8x P/E range and an EV/EBITDA of 4.5x. We believe, given strong management track record, the robust balance sheet, strong cash generation (FCF yield of c10%) good dividend yield support (4%) with pre-tax ROCE of c.16% the shares look good value at the current price.

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