Lookers PLC Robust H1, forecasts unchanged

Zeus Capital

Lookers Plc (LON:LOOK) has delivered a solid set of interim results this morning, with adj. PBT from continuing operations (ex parts) up 18% to £50.2m (H1 2016: £42.6m). There was a good performance across all new, used and aftersales demonstrating a robust margin performance across all segments of the business. The trading outlook remains uncertain as we are currently seeing across the sector, and clearly September remains key for the full year performance. We are maintaining our forecast assumptions for now, and believe the valuation remains undemanding given the company’s long term track record of generating value.

H1 Results: Revenue (ex parts) was up 5% to £2.46bn (2016: £2.34bn) as growth from new, used and aftersales. Gross profit increased by 3% to £264 million (2016: £257 million) with gross profit from continuing operations increasing by 17% (2016: £225 million). Underlying EBIT did fall slightly by 2% to £58.1m (2016 £59.1m). Interest costs were lower YOY at £7.9 million (2016: £9.0 million), due to lower levels of debt. Net debt was down to £61.9m (0.54x net debt/EBITDA) from £74.1m (0.65x net debt/EBITDA) as of December 2016. Together this delivered a 18% increase in adj. PBT at £50.2m (2016: £42.6m). We understand the recently acquired Knights and Drayton businesses contribute £5.9m of the adj. PBT figure which would suggest an ongoing run rate in PBT of £44.3m in the underlying business. The board has declared an interim dividend of 1.41p, up 10% on last year.

Key themes: New car revenue was up 10% YOY or 7% on a LFL basis, backed with a 16% (7% LFL) increase in gross profit which is impressive in the context of a new car market which saw a 4.8% decline in retail volumes over the same period. Used car sales saw similarly robust volume trends again with a 7% LFL increase YOY and 13% increase in used car gross profit. Margins in the used business appear to have remained robust over the period unlike some of the group’s peers who have seen pressure in this part of the business. The aftersales business saw growth in both revenue and margin with a 4% and 7% increase in revenue and gross profit respectively on a LFL basis.

Forecasts: We leave our forecasts unchanged for the full year. Clearly uncertainty continues to grow in the market, the outlook statement has become more cautious with management pointing to “the current political environment, Brexit and weaker exchange rates” as primary causes of growing uncertainty. As with the rest of the sector, September remains a key trading period and will be an important influence on the full year performance.

Valuation: While there is growing uncertainty across the sector, we believe this is more than priced into the shares as it trades on a prospective P/E of 8.5x. In the context of the company’s long term track record, a dividend yield of 3.0% and a FCF yield over 7.0% we believe the shares continue to look oversold. The balance sheet is also strong, and could also fund further enhancing M&A activity when the right opportunity presents itself in line with previous transactions.

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