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Lookers PLC Zeus Capital Research Updating Forecasts

Lookers PLC (LON:LOOK) Today saw a new update from Zeus Capital Partners: We adjust our forecasts following Lookers impending disposal of its parts division and subsequent re-investment in two premium dealer groups. The company has acquired Drayton for £55m which was conditional on the sale of the parts division and separately completed a further £27m acquisition of Knights. Management have deleveraged following the transaction with our 2017 net debt/EBITDA forecast now 0.3x and we estimate the company has over £100m of firepower available. We would back this management team to deploy this effectively, building long term value for investors.


Disposal of parts division and acquisitions: Following shareholder approval, we anticipate Lookers will successfully have disposed of the parts division for a cash consideration of £120m. To date and contingent on the disposal, the group has deployed £82m of the proceeds in acquiring premium dealer groups Knights and Drayton. This will add a total of 13 dealerships strengthening the motor division. We believe the shift in brand mix is favourable following the acquisitions made to date with Mercedes (added exposure via Drayton) and BMW/Mini (Knights) both clearly outperforming the market at present.


Forecasts: The impact of the transactions to date remains dilutive due to the loss of profits from the parts division. The dilutive impact however has been limited due to the acquisition of both Knights and Drayton which we believe should hit its target ROCE of 15% by the end of 2018 on a combined basis. We revise our FY17 PBT forecasts down 7% to £80.5m and our FY18 PBT down 5% to £84.5m. We cut our EPS forecasts accordingly for FY17 and FY18 by 6.8% and 4.9% respectively. There is clear scope for more transactions as we progress through next year with 2017 net debt/EBITDA at just 0.3x leaving the Group with over £100m of financial firepower.


Valuation: The shares currently trade at a 2016 EV/EBITDA of 4.0x based on our revised forecasts and a P/E of 6.4x, representing a 46% and 54% discount to the wider retail sector. Lookers now trades broadly in line with its UK dealer group on these measures, which we believe is unjustified given the strength of management, strong balance sheet and progress delivered to date. While conditions in the new car market may get more difficult from here, we believe Lookers is well positioned to continue to outperform and is well positioned at a time in the cycle where there may be opportunities to acquire businesses at very good value on a long term basis.


Catalysts: We anticipate a trading update from Lookers PLC in mid-November, which should give an idea of how the Group traded in September. We believe the recent share price weakness has been sector driven reflecting investor concerns on the impact of weaker sterling as well as the UK consumer going into 2017.

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