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Zeus Capital

Lookers Plc Is well positioned to outperform say Zeus

We anticipate strong FY results from Lookers Plc (LON:LOOK) next week, which will include a contribution for the parts business for most of the year, but also show good levels of outperformance in the all-important used car and aftersales markets. We expect the balance sheet to be strong following the parts disposal, which should be a comfort to investors at this stage of the cycle. While we do anticipate more difficult trading conditions post Q1 2017, we think Lookers will continue to outperform the market, and believe our below consensus estimates are cautiously set. The shares have recovered from their “post Brexit slump” of sub 100p, but the valuation remains undemanding.

FY results due 8 March – We are anticipating FY results from Lookers next week on 8 March. We are forecasting revenues +8% YOY, with gross margins -20bps due to mix changes towards new and fleet vehicles as previously flagged. Operating margins are expected to be flat YOY at 2.4% with Parts included in this performance for most of the year. We have forecast higher interest costs YOY as we expect higher stocking charges. We are forecasting an adjusted PBT of £78.0m showing good progress on the prior year (+8%), which was a record year and strong comparative. Adjusted EPS is expected to be 4% ahead YOY due to a higher tax charge of 20% anticipated vs. 16% last year. We are forecasting a dividend of 3.4p, which is 9% ahead of last year and currently yields 3%. A strong working capital performance has already been flagged and together with the proceeds from the parts disposal, we are anticipating a modest net debt position of £42.9m, which is 0.4x EBITDA.

Key themes – The Group reported a robust Q3 statement in November with YTD gross profits advancing 11% on a LFL basis. We expect to see some softening in margins for new retail cars, and this has already been flagged by other retailers. We expect a strong performance in used cars, and gross profits were +22% at the Q3 stage backed by further progress in margin. While we might see some slowdown on that growth rate, we believe the market backdrop in the used market remains robust. Aftersales also saw a strong performance with gross profits +24% at the Q3 stage or +8% on a LFL basis, which bodes well giving the rising UK car parc.

Forecasts – We reduced our forecasts 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. Our 2017 EPS forecasts are now 14% below the expected outturn in 2016, and look well set especially as we anticipate the industry will have a solid Q1 2017. The balance sheet could also lend itself to M&A activity that could also further underpin these assumptions further down the line.

Investment view: As with the rest of the sector, the valuation is undemanding, trading on a 2017E P/E of 9x based on cautious assumptions and an EV/EBITDA of 5.5x. The normalized FCF yield of 7% is also noteworthy from 2018E with the post-tax ROCE (ex Parts from 2017) at 13% also attractive based on our assumptions. While conditions in the new car market may well get more difficult from here, we believe Lookers Plc is well positioned to outperform especially at a time in the cycle where there may be opportunities to acquire businesses at very good value on a long term basis.

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