Shares in Lookers were left virtually unmoved at 44.05p with investors still far too worried about the declining UK new car market and profit margins under intense pressure.
The embattled motor retailer also flagged higher costs to come over the next few years as it fixes issues uncovered in its sales practices. However, in the face of continued tough trading conditions, Lookers left its full year 2019 pre-tax profit guidance intact, limiting today’s share price damage.
PROFITS HIT REVERSE
For the six months ended 30 June, Lookers reported a 27.5% slide in underlying pre-tax profit to £29.2m reflecting a challenging UK market backdrop. The good news is revenue increased by 2.7% to approaching £2.65bn, as Lookers outperformed a tough new car market and saw encouraging growth in used cars and higher margin aftersales.
The company states that the market for new and used cars is stalling because buyers appear to be putting off purchases as economic news gets worse. Many motorists are also waiting for more clarity over the status of diesel cars, sales of which have collapsed due to fears of stricter regulations on vehicle that use the fuel.
Yet figures released today from trade body the SMMT (Society of Motor Manufacturers and Traders) do not appear to entirely support this view.
It called the used car market ‘resilient in the face of political uncertainty’ after its own figures show a fairly modest 2.8% dip in sales in the second quarter of 2019, with the year to date figure down 1.7%.
Lookers’ half time dividend was maintained at 1.48p, but the full year dividend policy is under review.
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‘Our performance for the first half reflects an ongoing backdrop of challenging UK market conditions for the sector,’ said CEO Andy Bruce. ‘Whilst we are reporting lower profits year-on-year, we have made good progress on a number of strategic initiatives and have a clear investment plan to restructure and strengthen our regulated activities.’
Lookers is facing scrutiny from the Financial Conduct Authority (FCA) over how it incentives staff selling car finance packages. Last year, the firm found some control issues in its sales practices during an independent review of its internal control and audit processes, details of which it then shared with the FCA, about to probe the group’s sales processes between January 2016 and June 2019.
In today’s statement, Lookers outlined a remedial action plan that will involve a one-off cash investment of £10m covering a detailed review of past practices, a revised sales process and additional training and risk management procedures. Ongoing operating costs in full year 2020 and beyond are expected to increase by roughly £3m as a result of this plan.
REASONS TO BE CHEERFUL?
Despite myriad uncertainties facing the business Liberum Capital remains largely optimistic.
‘Estimate momentum is still negative,’ said the broker, ‘but we think that the worst may be over, albeit much depends on the impact of Brexit. Effecting a recovery in the current trading environment will be difficult but, despite recent mis-steps, we think that Lookers has a strong management team and the longer term thesis of industry consolidation is intact.’
‘Clearly the market backdrop remains challenging and uncertain, although the first thing that stands out is the robustness of first half trading,’ said analysts at broker Peel Hunt.
‘With net debt of 0.8-times EBITDA, strong freehold backing and improving market share, Lookers remains well placed to contend with the uncertainties of the next 6-12 months.’