We update our forecasts following Lookers announcement on the 1st November that trading has continued to deteriorate and the now expects adj. PBT in 2019E of £16m (vs ZC forecast of £39.0m previously) equating to a c.60% EPS downgrade, and a c.50% downgrade in 2021E. The group has experienced continued headwinds across new and used cars highlighted by recent SMMT data for October. The balance sheet remains robust with significant facilities available, 2019E net tangible asset value per share of 34p backed with freehold and long leasehold of 80p per share net debt/EBITDA at the end of 2019E of 1.2x, based on our new forecasts. There is clear long-term earnings recovery potential based on previous peak EPS of 15.8p in 2016A, albeit increased regulatory costs across the sector make reaching this peak unlikely in the near term.
- Trading update: Trading in new vehicles during the Period was below the Board’s expectations. In Q3 the Group recorded a -3.2% (H1 -1.2%) decline in like-for-like unit sales of new cars. This compared to a market decline of -0.6% (H1 -3.4%). September is normally one of the most profitable trading months of the year. The used car division exhibited a more stable performance, with a slight improvement in margins in Q3 compared to the 60bps decline in H1. Aftersales continued to perform well. Portfolio consolidation resulting in the closure or moving of 15 dealerships is expected to realise c.£3m of annualised cost savings per annum. SMMT data released on Tuesday confirmed the market was 6.7% down in October. Looking at the cumulative YoY performance for August, September and October we see that the market is down 1.3%.
- Balance sheet: The group has taken action on the balance sheet, consolidating the portfolio and disposing of 9 freehold sites for a net realisation (after one off disposal costs of £6m) of £22m. The Group’s balance sheet remains underpinned by a strong property portfolio. As at 30 June 2019 the Group held £312.1m of freehold and leasehold property equivalent to 80p per share. The Group’s bank facilities consist of a revolving credit facility of £250m with a term to March 2022. Net debt as at 30 June 2019 was £73.9m (31 December 2018: £86.9m). We expect net debt at the end of 2019E of £84.5m, representing 1.2x our EBITDA forecast of £70.7m. We have not changed our dividend assumptions in these forecasts and have not yet factored in any fine.
- Forecasts and valuation: We update our forecast to reflect the new guidance of £20m of adj. PBT in 2019E and allow these assumptions to flow through to 2020E and 2021E. We now expect adj. PBT in 2019E of £16m, going to £20.0m in 2020E and £22.0m in 2022E. Net debt at the end of 2019E is £84.5m based on these assumptions, going to £89.5m in 2020E. On updated forecast the group trades at a 2019E P/E of 14.5x and an EV/EBITDA of 11.8x.
