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Lookers PLC Trading update (Zeus Capital)

Lookers (LON:LOOK) has released a Q4 2019E trading update this morning, confirming a continuation of the challenging trading conditions in the new car market, with used and aftersales seeing more stable trading patterns. The group has successfully reduced net debt, primarily through the disposal of 4 freehold sites and the closure of a number of underperforming franchises and effective working capital controls. The balance sheet therefore has become more robust with significant facilities available. The 2019E net tangible asset value per share of 34p backed with freehold and long leasehold of 80p per share net debt/EBITDA at the end of 2019E now expected to be <1.0x. Mark Raban will become CEO with immediate effect, with Cameron Wade (Audi Franchise Director at Lookers since 2016) becoming COO. The search for a new CFO will commence shortly.

  • Trading update: In Q4 the Group’s like-for-like unit sales of new vehicles declined by -6.6% (Q3 -3.2%) compared to a UK market decline in new vehicle registrations of -1.6% (Q3 -0.6%). This continues to be impacted by the Group’s volume brands and is partially driven by a tactical reduction in lower margin fleet volume. The used car market was broadly stable during Q4. Unit sales of used cars increased by +3.8% (Q3 +2.6%). The Group remained focused on continuing to reduce and improve the profile of its used vehicle inventory and the margin stabilisation reported in Q3 continued into Q4. Like-for-like gross profit in aftersales was broadly flat during the period (Q3 +2.9%), with the corresponding period last year benefitting from non-recurring parts volume bonus. The group has largely completed the closure of 15 sites, identified in November for closure, as part of a wider review of the portfolio. Of the 15 sites, 9 were freehold, 4 of which have now been sold, generating £8.3m of cash, with the remainder expected to be disposed of in 2020E. We see from trade press that the group has closed its office in Newcastle, so clearly structural cost saving efforts are being made.  This together with some working capital improvements (lower inventory and improved debtor days) are the key drivers behind the group’s outperformance against our expectation on net debt for the year end.
  • Forecasts: We factor in lower net debt for 2019E from £84.5m to £62.0m but leave our trading assumptions for now. Trading for the first few weeks of 2020 is reported to be in line with expectations and we will review our assumptions in detail when Lookers reports full year results on the 11th March.
  • Investment view: Clearly near term trading remains challenging with the SMMT forecasting a further decline in the new car market in 2020. In our view, the balance sheet remains robust and the early signs of a turnaround are encouraging. There is clear long-term earnings recovery potential based on previous peak EPS of 15.8p in 2016A, albeit increased regulatory costs across the sector make reaching this peak unlikely in the near term.

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