AM Online

Lookers predicts strong market performance will continue

Lookers has returned record results in the July to September quarter, ahead of budget and "a significant improvement" on the same period in 2013, the AM10 group said today. It believes the momentum is sustainable.

"The UK new car market increased by 9.1% overall in the nine months to 30 September.

"Against this background, our motor division delivered another strong performance, increasing its market share by delivering total new car sales 12.6% higher than the corresponding period in 2013," a company statement reads.

"Our core retail new car sales were 11.7% higher than the previous year, on a like for like basis, compared to a UK market increase of 10%."

New car retail margins also improved year-on-year.

"We have recently raised our investment in the fleet sector, in which our volumes increased by 19.5% in the period, more than double the growth in the market, which rose by 8.2%. We continued to concentrate on quality fleet sales and avoid very low margin business; margins for the period were slightly ahead of last year."

Used car volumes increased by more than 30% in the past two years, with further growth seeing volumes increase by 5.4% compared to 2013, which was also a strong period, together with margin improvements despite a flat used car market.

"This highlights our successful focus on used car sourcing, pricing, stock management and ongoing increases in sales leads and enquiries, generated by the group website Lookers.co.uk in which we continue to invest to deliver greater functionality and further increases in enquiries."

Aftersales turnover increased by 6.3% on a like for like basis compared to 2013, benefitting in part from the growth in the vehicle parc of cars under three years old.

"This trend should continue due to the increase in the new car market over the last two years," Lookers said.

"The increase in volumes and margins demonstrates the benefits from our continuing investment in technology and procedures to improve both customer retention and average sales value per customer visit. It also reflects the success of our focus on increasing customer retention through the sale of service plans.

"Our commitment to enhance customer experience continues with the objective of improving retention and delivering our 'customers for life' strategy to strengthen the business and improve profitability further."

Lookers' independent parts division saw increases in turnover and profits compared to the prior year, against a background of an improving, yet competitive market.

Turnover rose by 5% compared to the prior year.

Cash flow was "significantly higher" compared to budget and the ratio of net debt to EBITDA remains well below 1.0.

Outlook

Considering the year-to-date, Lookers management said it believes the positive momentum is sustainable and that the group is positioned to deliver further growth in the final quarter of 2014 and produce results for the year slightly ahead of current market expectations, "which will represent a significant increase over the result for the previous financial year".

Analyst's view

Author: Mike Allen, director, equity research, Zeus Capital

Lookers has delivered another positive update.

Once again this is a record result for the group during the key trading period of September with the results ahead of budget showing a significant improvement versus strong results last year.

We believe the current adjusted profit before tax consensus range is £60.4 - 61.0 million to December 2014, and would expect this to be conservatively upgraded towards £61.5m on the back of this statement. There is unlikely to be any major changes to 2015 and 2016 forecasts with visibility still limited.

Key performance drivers:

Lookers continues to gain share in all of its core markets.

Core new car sales were +11.7% on a like-for-like basis versus the market +10% with margins further improved versus the prior year.

Recent investment in fleet saw volumes +19.5% during the period, which compared to the market +8.2% with margins said to be slightly ahead.

Used car volumes were +5.4%, which was a strong performance in the context of a flat market coupled with its volumes increasing +30% during the past two years due to self help initiatives.

Its online strategy is paying dividends in delivering significant enquiries and sales leads to drive this growth, with good sourcing, price management and stock turn further improving margins.

The aftersales business saw revenues +6.3% during the period, which bodes well as the UK car parc is now in expansion mode.

Margins are helped by improving customer retention and average spend per visit rising in this business, which is also encouraging.

The parts business made good progress with revenues +5% and margins slightly improved due to a careful control of overheads.

This is a good result in the context of Unipart Automotive recently going into administration, which used to be a major customer of FPS (75% of the parts division).

While this has been a headwind, the company has been diversifying away from this core customer for at least five years and there was no outstanding credit issues.

Cash generation continues to be strong, with year-end net debt expected to be in the £45-50m range. This should leave at least £40m of surplus capital for acquisitions on a normalised basis, and we anticipate further consolidation in the sector during 2015 and beyond.

Conclusion

This is another strong update from a major player in the UK motor retail sector, which should be taken well by the market today.

The shares are currently trading on a 2014E P/E of 11x falling to 10x in 2015 with an EV/EBITDA of sub 7x in both years and a FCF yield 7-8%, which is believe is very attractive for a business of this quality firmly on track to deliver above average EPS growth (18% in 2014 and a three-year CAGR of 20%). 

We view this as a positive read across for the rest of the sector.

We await a market update from Pendragon over the coming weeks with Cambria Automobiles scheduled to announce final results on November 25.

 



If you are not a registered user your comment will go to AM for approval before publishing. To avoid this requirement please register or login.

Comment as guest


Login  /  Register

Comments

No comments have been made yet.