Lookers plc, (LON:LOOK), one of the leading UK motor retail and aftersales service groups, issued its trading update for the period ended 30 September 2018.
Trading was positive in the third quarter, against strong comparatives, with an encouraging result during the important month of September and with full year expectations unchanged.
New car market
The sale of new cars represents approximately a third of gross profit for the Group. The UK new car market has had a volatile year with year-on-year reductions in most months, meaning that the market was down by 7.5% at the end of September. Current industry forecasts by The Society of Motor Manufacturers & Traders (SMMT) for the full year are now at 2.38m, a reduction of 6.3% compared to last year. However, this would still represent a historically high level of registrations.
The UK new car market in September reduced by 20.5% compared to the prior year, having increased by 23.1% during August. The principal factor behind this reduction was a shortage in the supply of vehicles that had not been tested under the new WLTP emissions regulations, which became effective from 1 September. We referred to this in our interim report on 15 August, where we anticipated the potential for some disruption in the production and supply of certain vehicles.
Against this background, we are pleased to report a very respectable result for the important month of September, despite the challenges in the supply of new cars. We were able to mitigate the effect of the reduced volumes in the market and take advantage of this short supply by improving our margins on new cars across the quarter as a whole.
We expect to see higher levels of vehicle sales in the final quarter with recent supply issues easing, as further vehicles pass through the new testing regime.
The results in the nine months to 30 September for new cars were as follows:
· Turnover and volumes of new cars reduced by 7%, in line with the wider market;
· Total gross profit from new cars reduced by 5%;
· New car margins and profit per unit were higher than the prior year.
Used car market
The used car market continues to be buoyant and values have remained stable and predictable in the period. Used cars contributed 27% of total gross profit and are an important and successful part of our business, delivering additional growth in both volumes and gross profit. With our increased focus on used cars we were pleased to replace the reduction in new car gross profit in September with the improvement in used car gross profit in the month.
The results in the nine months to 30 September for used cars were as follows:
· Turnover of used cars has increased by 10%;
· Gross profit from used cars increased by 10% during the period with improved margins per unit.
Aftersales
Our higher margin aftersales business, which represents 42% of total gross profit, performed well in the period and during the nine months to 30 September has seen:
· Turnover was up by 5%;
· Gross profit was up 6%.
Acquisition during the period
On 17 September the Group acquired the entire issued share capital of the Jennings Group for a net payment of £5.6m. The Jennings Group is a long-established motor retail group in the North East of England with an excellent reputation. Whilst Ford is their key brand partner, particularly in the Teesside area, they also represent Kia, Seat and Mazda. The acquisition complements and strengthens Lookers’ position in the region and we are delighted to expand our key partnership with Ford. Given the timing of the acquisition the Board expects it to be earnings neutral this year with a modest enhancement next year.
Cash flow and balance sheet
The Group continued to generate strong operational cash flow in the period which was significantly higher than the prior year. In addition, we sold three properties during the period with total proceeds of £35m, which has further contributed to the strong cash flow. We have a strong balance sheet which continues to be supported by operational cash flow, with both net debt and net debt to EBITDA being at relatively low levels.
Summary and Outlook
The Group has produced a positive financial performance for the first nine months of the year, against more challenging market conditions for new cars and strong prior year comparatives.
The Board therefore believes, based on the performance in this period, that results for the year ending 31 December 2018 will be in line with current market expectations.
