Lookers Plc (LOOK:LON) has announced a trading update this morning confirming they continue to trade in line with market expectations. The group has delivered a credible performance in the context of significant trading headwinds, achieving gross margin expansion new car sales and aftersales. We leave our forecasts for 2018E unchanged but downgrade 2019E and 2020E adj. PBT by 10.2% and 5.5% respectively, reflecting our more conservative market outlook. While trading headwinds persist, we continue to believe Lookers is well positioned, with a robust balance sheet, to deliver shareholders returns over the long term and a FCF yield approaching 10%.
Trading update: Lookers has delivered a positive Q3 update this morning, in the context of difficult market conditions, confirming they continue to trade in line with market expectations and remain on track to meet full year forecasts. The recent acquisition of Jennings group, a well-respected private group, which is expected to be earnings neutral for the current financial year and enhancing from 2019E has also been confirmed. The group disposed of three properties during the period for net proceeds of £35m further strengthening the balance sheet. As a result, net debt/EBITDA is 0.6x in 2018E, which falls to below 0.2x by 2020E leaving it in a strong financial position.
Key performance drivers: Revenue from new car sales was down 7.0% during the period, driven by a falling market. This has been partially offset by gross margin expansion resulting in a decline in new car gross profit of 5.0%. Used car sales and gross profit grew during the period by 10.0% reflecting the continued efforts by management to capitalise on this as an area for delivering growth in profits in what remains a flat market. Gross margin expansion was also achieved in aftersales with gross profit up 6.0% while revenue grew by 5.0%. This was a strong outcome given the lack of activity in new cars.
Forecasts: We updated our forecasts to reflect the disposal of three properties and the acquisition of Jennings group during the period. We now expect net debt in 2018E of £58.6m. We leave our trading assumptions for 2018E unchanged but downgrade 2019E and 2020E adj. PBT by 10.2% and 5.6% respectively reflecting a more conservative view of the market, which in line with the downgrades carried out elsewhere in our industry thesis note published on 5th October.
Valuation: Based on updated forecasts the stock trades on below 8x P/E with our forecasts likely to be at the lower end of the consensus range and an EV/EBITDA below 4.5x. We believe, given management track record, the robust balance sheet and the FCF yield approaching 10% that this valuation looks attractive on a long-term basis
