Lookers plc (LON:LOOK) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: Mike, you’ve published a note on Lookers following their trading update. What were the key highlights from the update in your opinion?
A1: From a trading perspective, the company has said that they now expect underlying PBT to be ahead of market consensus, which at the time was £82 million, that was driven by strong new car margins, good cost control and good like-for-like growth in aftersales. They also said that the balance sheet was strong, cash management was strong as well and they expect £8 million of net cash by the year end.
I think the thing that surprised us though, in a good way, was the new strategic framework and this is overall aimed at maximising revenue and profit opportunities and the aim now is to become the UK’s leading, integrated automotive retail and service group.
I think we’ll hear more about the strategy in April when they report results but this framework really is about operational optimisation, investment in technology and digitalisation, expanding OEM relationships, increasing used car vehicle penetration, developing aftersales revenue streams, and leveraging their corporate leasing and fleet capabilities.
So, there’s a lot to go for in terms of improvement etc. on the strategy which I think is exciting because the group now can start to look forward after a difficult restructuring period, which they’ve come out of very well.
Q2: Have you made any changes then to your forecasts?
A2: We’ve updated our ‘21 PBT forecast, we’ve upgraded those by about 6% so £81.4 million goes to £86.2 million, that’s driven really by higher margin assumptions and revenue growth in aftersales.
We’ve also pencilled in a progressive dividend as well from 2021, which again is another big sign of strategic progress and we’ve also aligned on their cash forecast with £8 million guidance at the end as well. We are assuming higher capital expenditure going forward and obviously factors now in the progressive dividend as well.
Q3: Now, just in terms of an investment case, how do you see Lookers?
A3: I think the company has come through a very difficult period. Looking forward, I think that it’s a scale group that want to get bigger which is very good as well and looking forward to learning more about the strategy and how they intend to execute that.
If you look at the company as an asset, it’s still trading on less than 5 times ‘21 earnings, our ‘22 forecasts are more cautious than ’21 so whereas we were forecasting for £86 million for ‘21, we’re only forecasting £53 million to ‘22. Even on that basis, where we’re assuming quite a big drop in profitability this year, probably out of conservatism, it’s still on a PE of less than 7 times with a yield of 3%.
So, even looking forward on cautious ‘22 numbers, we think the shares are very cheap and I think even if we apply conservative 10 times PE multiple to our ‘22 numbers, we get to 109p per share, which is over 45% upside to the current share price.
So, we think the shares remain very cheap and the strategy is very exciting.
