LOOK trading in line with expectations, but undervalued say brokers
Companies: Lookers plc
UK automotive retailer Lookers plc (LSE: LOOK), issued a positive trading update this morning saying it had produced good performance during the quarter, with especially good results in September.
Gross profit from new cars was up 11% year-on-year, whilst gross profit from used cars was up 22%. Increased web traffic and leads were key to the increase in used cars sold. After sales increased gross profit 24%, too.
Major developments in the period included the sale of parts division to Alliance Automotive for £120m, the acquisition of Warwick Holdings, and the acquisition of Knights North West Limited for £27m.
"These transactions have made a significant change to the company by adding seven Mercedes-Benz and Smart dealerships, three BMW and three MINI dealerships.
These will replace most of the profits previously generated by the parts division which ceased to be part of the group on 4 November."
Cash flow was strong during the period and significantly beat the budget on operational and net levels, and Net debt to EBITDA was also better than last year.
Looker's balance sheet was strengthened by good operational cash flow and, coupled with its substantial bank facilities, gives the group financial security and enables it to fund further strategic acquisitions.
The company's performance during the period builds on good results last year, albeit with the uncertainty created by the EU referendum.
"As we said in our interim results in August, we have not noticed any significant difference in terms of customer behaviour so far, particularly in respect of orders for new and used cars.
Notwithstanding the uncertainties over consumer confidence and the £:€ exchange rate, the board is confident that the group will make further progress during the rest of this year with revenue and profits ahead of last year's performance and in line with market expectations."
Broker N+1 Singer said performance had continued to be strong, and based on sector PERs and overall strength, confirmed it believed the firm's P/E to be "anomalous":
"In line with the wider market LFL GP in New, the smallest profit stream, has weakened compared to H1. Performance so far after 9 months is therefore on track to meet full year expectations.
The group has continued to improve its net debt position (following the Parts disposal) and Lookers has substantial financial headroom to pursue further accretive acquisitions should opportunities present themselves."
Whilst Zeus Capital said the update was essentially management confirming that it was trading in line with expectations. Analyst Mike Allen estimates that the group has more than £100m of "firepower" available for further development:
"Management have deleveraged following the recent transactions with our 2017 net debt/EBITDA forecast now 0.4x based on our revised forecasts and we estimate the company has over £100m of firepower available.
We are tweaking our forecasts down in 2017 and 2018 by 4-5% at the EPS level to reflect more conservative assumptions, and expect consensus levels to fall within this range accordingly. That said, we believe the valuation of the shares based on these more cautious assumptions remains compelling with Lookers well positioned longer term."