WHY IS LOOKERS REDUCING ITS DEBT?

LOOKERS' GEARING (%)	LOOOKERS' RoS (%)
	Source: www.am-online.com/ami

Car retailing is intrinsically cash-positive, even done relatively poorly. For example, if Lookers had made a loss (of say £1) last year, they would still have made £30 million when items that do not consume cash, such as depreciation and amortisation, are added back.

Lookers’ profit before tax for 2013 was £44m. Add back depreciation and amortisation and the cash profit (EBITDA – earnings before interest, tax, depreciation and amortisation) is £75m. This offers the group choices:

♦  return money to shareholders

♦  buy more businesses

♦  invest in new profit streams

♦  repay debt.

Dividend yield is 2.17, which is better than Pendragon, but the FTSE100 best 50 show a yield ranging from 3% to 14%.

Colborne Garages was purchased in 2014, but that transaction still leaves substantial cash resources.

Lookers has successfully diversified into parts wholesaling. However, there do not appear to be any further plans to invest in new areas.

So this appears to have left debt reduction as the remaining opportunity. Gearing, from a comparatively modest high of 65% at the height of the recession, has reduced to 28%.

Since 2008, Lookers has been steadily improving the business, so if this trend can be maintained, the problem of what to do with the cash will become more acute.

Lookers’ chief executive Andy Bruce acknowledged that a balancing act was required: “We have increased the dividend by more than 40% in the last three/four years and we’ve signalled generally to the market to expect a 10% progressive increase.  

“We’re growing the profits a lot faster than 10% and therefore the yield is weakening all the time. But, of course, these dividends cost money.

“And in the last three years we’ve invested £55m in acquiring businesses. This year they will make £17m – a 31% return – and if our share price in the fullness of time tracks that type of return then it will dwarf any improvement in dividend, even if it went to 4%.”

He said the group considers total shareholder return, an element of which is dividend yield, but demanding greater attention is the question of what to do with cash.

“We don’t want to gear the balance sheet to the level it used to be,” Bruce said. “ We all learned that painful lesson when the banks were throwing money at us. So, we’ve got relatively conservative gearing. We measure it on a debt-to-EBITDA ratio, so it’s about 0.5:1.0 at the moment.  

“We would let that float up a bit beyond 1.0 before an acquisition. But of course the bigger the company is getting, the EBITDA gets bigger. We bought Colborne for about £30m in cash in March and we ended up at the half-year with the same debt as we did at the start of the year, such is the amount of cash we’re generating.” The group will be acquiring again, he said.