Lookers has confirmed that trading in Q219 has become more difficult following a positive Q119 performance. While new car markets remain challenged mainly by Brexit uncertainty, the main trading issue has been in used cars as residual values fell through the quarter. The shares have also been affected by a formal Financial Conduct Authority (FCA) investigation into selling processes on regulated activities. Together with a £5.6m adjustment to underlying FY19 PBT due to a change to the treatment of intangible amortisation, our estimates are substantially revised. We now expect an adjusted FY19e PBT of £40.8m, leaving the shares trading on a FY19e P/E of just 5.5x. We assume the dividend is maintained in FY19 with cover of 2.0x, which may provide support, but we will review this after the board’s decision with the interim results on 14 August.
While Brexit uncertainty continues to undermine the confidence of both business and retail car buyers in new vehicle markets, it was deteriorating performance in used-car markets that led to management reducing its H119 underlying PBT expectation to £32m, an £11m fall from H118. However, some of the fall relates to lower property profits than had been expected. What has had a severe impact is a progressive decline in used-car residual values from April to June, we estimate of around 9%. We feel this has been exacerbated by some specific destocking issues at peers, but with significant used-car inventory not only has there been a reduction in margins as prices fell but also an impact from stock write-downs. These factors could stabilise and the market may recover, but we do not assume this at present. As previously announced, the company is also adjusting underlying PBT to include intangible amortisation, which will reduce profit for FY19 by c £5.6m. Lookers has also announced that Robin Gregson, the CFO since May 2009, is to be succeeded by Mark Raban, former CFO of Marshall Motor Holdings.
The unexpected news regarding regulated activities has hurt sentiment. The FCA is to launch a formal investigation into the company’s selling process from January 2016 to June 2019.
The very low rating of the stock on depressed profitability does not allow for any improvement in car markets. However, the FCA situation could have financial consequences. We await additional comments on the outlook at the interims.