Lookers Plc (LON:LOOK) have this morning released a trading update for the three-month period to 31 March 2018, essentially confirming the group continues to trade in line with expectations and is seeing good trading momentum, particularly in used and aftersales. The group has a strong balance sheet, supported by positive operational cash flow. We continue to believe the shares look oversold, particularly in the context of its balance sheet flexibility, undemanding valuation and progress delivered to date based on strong management execution across all areas of the business.
Trading update: The group’s new car revenue declined 4% during the period, which we see as a strong performance in the context of a 12.4% decline in new car registrations in the first quarter. During the period the group sold two properties under sale and leaseback contracts with sale proceeds of £30m. This has had a positive and beneficial impact on cash flow in the period as well as helping to fund the capital expenditure programme. While the car market continues to be challenging, the group highlights good momentum in the used car and aftersales businesses and expect to make further positive progress during the year.
Key themes: New car revenue was -4% against a tough comparative period, with a modest reduction in gross profit per unit resulting in an 8% decline in new car gross profit. The performance in used cars was once again impressive, revenue was +8% with improvements in gross profit per unit delivering a 6% increase in used car gross profit compared to the prior year, we believe this demonstrates the best trends in the sector. The aftersales business continued to deliver both revenue and margin growth with gross profit in aftersales 2% higher on slightly higher revenue.
Forecasts: We are maintaining our forecasts on the back of these results and are likely to remain at the lower end of the consensus range. We also add in our 2020E forecasts for the first time and continue to take a conservative approach at this juncture despite clear demonstration of strong execution in uncertain market conditions.
Investment view: We continue to believe the shares are oversold particularly in the context of Lookers Plc’s long-term track record. The valuation multiples are largely in line with the UK dealer average. We believe our forecasts are conservative as we assume 2018 to be the trough year, and these assumptions maybe further underpinned by acquisition activity as we anticipate management to utilise its strong balance sheet. The 2019E and 2020E FCF yield of 11% looks noteworthy to us based on normalised capex trends as the investment cycle starts to ease following high levels of activity in recent years. The dividend yield of c4% also looks attractive to us, and we anticipate a trough post tax ROCE of 10% in 2018E, which should start to trend back to more normal levels of 13-15% if recovery starts to build.
