Lookers shares are still undervalued says Zeus

Lookers plc (LON:LOOK) has released an H1 trading update reporting a continuation of strong performance year to date. H1 2022 underlying PBT is expected to be c. £45m and Management anticipate full year PBT will also be ahead of prior expectations. We therefore increase our FY22 underlying PBT forecast by 18.7% to £63.0m, with the view that profits will be heavily H1-weighted this year because of the intensifying squeeze on UK consumer spending power. On our forecasts, Lookers now trades at 5.7x FY22 P/E, which we think is materially undervalued for a company with a robust balance sheet, 4.1% dividend yield, and further opportunities to grow earnings through operational optimisation and strategic initiatives.

¨ Trading update: Overall UK registrations were down 8.7% YTD in May 2022 vs. the same period last year, primarily due to ongoing supply constraints. Lookers’ new car sales have broadly tracked the total market, albeit outperforming the market in the brands which it represents. Lookers’ used car volumes declined 8.1% in the five months to 31 May, whilst aftersales revenues have been robust and shown growth over the period. The Group’s focus on operational optimisation has generated cost savings that helped to offset material cost increases in other areas (e.g. staff and utilities). Management’s expectation of £45m underlying PBT in H1 2022 is c. 10% less than the £50.3m in H1 2021, however, £12m of government support was received in H1 last year, whereas none was received in H1 2022. Net cash (ex. leases) at 31 May 2022 was £62.4m, a substantial increase from £33.0m at 30 June 2021, owing to strong trading and a focus on cash management.

¨ Forecasts and outlook: We have reduced our FY22 growth assumptions for new car and used car revenues, reflecting supply shortages which are expected to persist throughout 2022, decreasing total FY22 revenue forecasts by 1.9% to £4.2bn. However, the supply shortages mean we increase our full year gross margin assumptions for new and used cars, because OEMs prioritise higher margin models and channels and used car prices are supported. This translates to an increase in our FY22 underlying PBT forecasts of 18.7% to £63.0m from £53.1m. Our full year forecast and the expected £45m for H1 2022 implies c. 70:30 split in H1:H2 underlying PBT. This split appears reasonable given that the BoE expects inflation to exceed 11% later this year, creating the potential for significant consumer demand headwinds and for increased cost pressures later in the year. Changes to Zeus forecasts are summarised on page 2 of this note. We leave FY23 and FY24 unchanged today given the limited visibility of supply and demand conditions.

¨ Valuation: Based on updated forecasts, Lookers trades on a one-year forward P/E ratio of only 5.7x and EV/EBITDA of 3.5x, with a dividend yield of 4.1%. Whilst we expect a tougher H2 for Lookers, in our view the shares are still undervalued and now trades at a discount to the peers shown on page 2. The Group has significantly strengthened its balance sheet over the last two years and holds property and cash equivalents equal to c. 91p per share at 31 May 2022, c. 23% above today’s share price. As discussed in prior notes, the sector has historically traded through the cycle on a P/E range of 8-14.0x, making the current valuation of 5.7x FY22 P/E look exceptionally low. At 10.0x FY22E EPS, Lookers would be valued at 129p per share.

Summary financials

Price74.0p
Market Cap£290.3m
Shares in Issue392.2m
12m Trading Range54.0p– 101.0p
Free float79.90%
Next EventH1 results – Sep 2022

Financial forecasts

Yr end Dec (£’m)2021A2022E2023E2024E
Revenue4,0514,1984,5034,737
yoy growth (%)9.53.67.35.2
Adj. EBITDA^168.7143.9139.1144.3
Adj. EBIT^114.882.177.382.5
Adj. PBT^90.7635762.6
EPS (p) ful dil. Adj.20.112.911.111.9
DPS (p)2.533.23.4
Net cash/(debt)^^344.944.446.4
P/E (x)3.75.76.76.2
EV/EBITDA (x)33.53.73.7
Div yield (%)3.44.14.34.6
^Adjusted for non-underlying items such as gain/loss on property disposals and share-based payments
^^Excluding IFRS 16 Leases
Source:  Audited Accounts and Zeus estimates
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