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Zeus Capital

Lookers PLC Solid trading update

Lookers Plc (LON:LOOK) has released a solid trading update this morning ahead of its Capital Markets Day this afternoon, essentially confirming they are trading in line with expectations. We are maintaining our cautious forecast assumptions for now as we anticipate the backdrop, particularly in new cars, to get tougher through H2. That said, the strong performance across all three divisions of the company is encouraging. As with the rest of the sector, we believe current risk levels are priced in and believe the current valuation looks undemanding.

Trading update – Lookers has confirmed it is trading in line with expectations with a strong performance across all three business divisions. A strong new car performance on a lfl basis was likely helped by the increase in Vehicle Excise Duty from 1 April 2017, which will have had the effect of potentially bringing forward sales from April to March and this appears to be confirmed by the April new car registrations. The group has a strong balance sheet where the level of net debt to EBITDA has improved compared to the prior year and continues to be strengthened by operational cash flow. There is headroom in current bank facilities which provides additional funding capacity to help develop the business through further strategic acquisitions.

Key themes – New cars outperformed the wider UK market with volumes up 7.4% (vs. 6.2% in the wider market). The lfl performance in new car sales was particularly encouraging with volumes up 9.2% on a ke basis driving 17% growth in new car gross profit. Used gross profit was up 23% on the previous year (17% on a lfl basis) with higher volumes driven by online leads, as the group continues to develop its online offering. Similarly aftersales exhibited a strong gross profit performance, up 18% on the previous year (9% on a lfl basis) off the back of 17% revenue growth (8% on a lfl basis). The balance sheet remains robust, as many do in the sector, as a strong operational cash flow generation has led to an improvement in the net debt/EBITDA ratio year on year. We would expect to see some strategic acquisition activity as the consolidation in the sector continues.

Forecasts – We reduced our forecasts for Lookers Plc 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 valuation is undemanding, trading on a 2017E P/E of sub 10x based on cautious assumptions and an EV/EBITDA of 5.1x. 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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