Lookers shares to trade in excess of 150p says Zeus

Lookers plc (LON:LOOK) has announced FY21 results that show record underlying PBT of £90.7m, 5.3% above our forecast of £86.2m. The outlook is suitably cautious given current supply constraints and likely impact of inflation on future consumer demand. However, Q1 2022 has started well and trading is ahead of the prior year. We make no changes to underlying PBT forecasts at this time, but maintain our view that Lookers remains significantly undervalued along with the rest of the sector.

¨ FY21 results summary: Lookers has delivered a strong set of FY21 results, which are ahead of our forecasts at the adjusted PBT and EPS level and are significantly ahead of last year. Revenues were +9% compared to FY20, albeit below our forecasts due to supply shortages that intensified in H2. Adjusted EBIT (at £114.8m) was 6.0% ahead of our forecast, driven by higher used car margins. Interest costs at £24.1m were higher than our £22.1m forecast, but the 2.8% EBIT margin vs. 2.5% forecast more than offset this to drive underlying PBT of £90.7m (adding back SBP of £0.6m on top of Management’s adjustments) to beat our forecasts by 5.3%. Adjusted diluted EPS of 20.1p was higher than our 17.7p forecast due to the impact of deferred tax and prior period tax adjustments. The FY21 dividend of 2.5p was higher than our 2.0p forecast, which reflects better operating cash generation and increased confidence in the future.

¨ Outlook: Current gross margins during Q1 2022 are on par with last year driven by robust consumer demand and supply constraints on both new and used vehicles. A tight control of costs has also ensured that profit levels (on an underlying basis) are ahead of last year. However, it’s clear that the semi-conductor shortage as well as the impact on Ukraine will see ongoing supply constraints with increasing cost pressures. The crux of the issue is whether Lookers can offset inevitable cost inflation with initiatives that have been identified as part of its new strategic outlook. We believe there is significant opportunity for Lookers to do this as it continues to streamline and improve the business across used cars, aftersales and leasing, to name a few examples.

¨ Forecasts: Our forecasts have been updated the reflect the £20m net cash proceeds from the sale and leaseback of a freehold dealership property in Battersea, London, announced in March 2022. We reduce our FY22 and FY23 revenue forecasts 6.5% to reflect the constrained supply but have maintained our underlying PBT forecasts, while we also introduce our 2024 forecasts for the first time. We are assuming ongoing progress from a re-set 2022 baseline, following a record 2021, which we have applied across the sector.

¨ Valuation: Based on our forecasts, Lookers now trades on a P/E of 8.8x FY22 and EV/EBITDA of 4.4x, with a dividend yield of 3.1%. We believe the sector remains significantly undervalued compared to prior mid-cycle averages of 10.0x-14.0x P/E, especially in light of current Q1 trading being ahead of last year, even with significant headwinds being anticipated from here. At 10.0x FY22E EPS Lookers would be valued at 109p per share. As the Group continues to deliver strong results, growth and cash generation, we can see potential for multiple expansion and for shares to trade in excess of 150p.

Summary financials

Financial forecasts

Source: Audited Accounts and Zeus estimates

^Adjusted for non-underlying items such as gain/loss on property disposals and share-based payments

^^Excluding IFRS 16 Leases and vehicle rental lease liabilities