# Lookers PLC Positive Q3 update

- Link: https://www.directorstalkinterviews.com/lookers-plc-positive-q3-update/412739554
- Published: 2017-11-09T07:41:09+00:00
- Author: Giles Arbor

**Lookers Plc** (LON:LOOK) has demonstrated good growth in a challenging new car
market with clear outperformance against the market and its peers. We are maintaining
our forecasts at this juncture, albeit have made conservative assumptions from 2018E
based on our cautious sector stance. That said, we believe the shares are oversold
particularly in the context of its balance sheet flexibility, undemanding valuation
and progress delivered to date based on strong management execution across all areas
of its business.

**Q3 trading update: **Lookers has delivered a positive Q3 trading update, confirming
that it continues to perform in line with expectations, with a solid result delivered
in September against strong prior year comparatives. The balance sheet is in strong
shape, with 2017E net debt/EBITDA expected to be 0.7x at the year end with substantial
headroom in its bank facilities. We believe this will give significant flexibility
and capacity to grow by acquisitions when the right opportunities are presented.
A share buyback programme has also been announced, subject to certain pricing, liquidity
and quantum parameters, which will be given at a later date.

**Key performance drivers: **Lookers has outperformed the market across all areas
of its business. New car turnover was +5% on a LFL basis, with gross profits +6%
LFL. Margins and profit per unit on both new retail and fleet cars were higher than
the prior year, suggesting bonus targets were hit and well executed. It is well 
known that the market has deteriorated since April 2017, albeit Lookers have indicated
that its key OEM partners recognise this more difficult trading environment and 
are taking supportive action such as reducing targets, increasing incentives and
helping to reduce operating costs, which is good news. The used car performance 
was also excellent with turnover +14% on a LFL basis, with gross profit +20% YOY
and +12% on a LFL basis. Online lead generation continues to be a key success driver
behind this, with used car values said to be stable, which is consistent with industry
data. Aftersales revenue was +4% on a LFL basis, with gross profits +6% on the same
basis backed with margin improvements as it continues to benefit from growth in 
the vehicle parc.

**Forecasts: **We are maintaining our forecasts on the back of this update, with
management confident of hitting 2017 expectations following this strong 9-month 
performance. We did reduce our forecasts for Lookers Plc from 2018E last week as
we took a more cautious view on the sector prospects, which was largely driven by
ongoing weakness in the new car market coupled with cost pressures. Our forecast
assumptions are therefore at the low end of the consensus range, and could well 
be too cautious.

**Valuation: **Despite our conservative forecasts from 2018E, we believe the valuation
is very undemanding with the stock trading on 8x 2018E EPS, and an EV/EBITDA of 
5x backed with a dividend yield of 4%. The FCF yield based on peak levels of capex
is running at 5% at present, but from 2019 (capex running at 1.2x depreciation) 
should be in excess of 10%, which we believe is highly attractive. We believe the
shares are oversold at present, and would expect the shares to react positively 
this morning given the Q3 growth delivered and outperformance vs. the market.

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