Lookers Plc (LON:LOOK) has demonstrated good growth in a challenging new car market with clear outperformance against the market and its peers. We are maintaining our forecasts at this juncture, albeit have made conservative assumptions from 2018E based on our cautious sector stance. That said, we believe the shares are 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 its business.
Q3 trading update: Lookers has delivered a positive Q3 trading update, confirming that it continues to perform in line with expectations, with a solid result delivered in September against strong prior year comparatives. The balance sheet is in strong shape, with 2017E net debt/EBITDA expected to be 0.7x at the year end with substantial headroom in its bank facilities. We believe this will give significant flexibility and capacity to grow by acquisitions when the right opportunities are presented. A share buyback programme has also been announced, subject to certain pricing, liquidity and quantum parameters, which will be given at a later date.
Key performance drivers: Lookers has outperformed the market across all areas of its business. New car turnover was +5% on a LFL basis, with gross profits +6% LFL. Margins and profit per unit on both new retail and fleet cars were higher than the prior year, suggesting bonus targets were hit and well executed. It is well known that the market has deteriorated since April 2017, albeit Lookers have indicated that its key OEM partners recognise this more difficult trading environment and are taking supportive action such as reducing targets, increasing incentives and helping to reduce operating costs, which is good news. The used car performance was also excellent with turnover +14% on a LFL basis, with gross profit +20% YOY and +12% on a LFL basis. Online lead generation continues to be a key success driver behind this, with used car values said to be stable, which is consistent with industry data. Aftersales revenue was +4% on a LFL basis, with gross profits +6% on the same basis backed with margin improvements as it continues to benefit from growth in the vehicle parc.
Forecasts: We are maintaining our forecasts on the back of this update, with management confident of hitting 2017 expectations following this strong 9-month performance. We did reduce our forecasts for Lookers Plc from 2018E last week as we took a more cautious view on the sector prospects, which was largely driven by ongoing weakness in the new car market coupled with cost pressures. Our forecast assumptions are therefore at the low end of the consensus range, and could well be too cautious.
Valuation: Despite our conservative forecasts from 2018E, we believe the valuation is very undemanding with the stock trading on 8x 2018E EPS, and an EV/EBITDA of 5x backed with a dividend yield of 4%. The FCF yield based on peak levels of capex is running at 5% at present, but from 2019 (capex running at 1.2x depreciation) should be in excess of 10%, which we believe is highly attractive. We believe the shares are oversold at present, and would expect the shares to react positively this morning given the Q3 growth delivered and outperformance vs. the market.
