As the wider market weakens on the last trading day of May amid heightened trade war worries, motor retailer Lookers (LOOK) creeps 0.6p higher to 86.4p on news of a surprisingly positive first quarter.
Today’s annual general meeting (AGM) update not only flags out-performance of a challenged new car market, but also ongoing momentum in used cars and after-sales. That said, the scope of the share price advance is moderated by indications of a tougher start to the second quarter in new car sales.
READ MORE ABOUT LOOKERS HERE
Chairman Phil White describes the performance in the quarter ended 31 March as ‘positive’, with a strong result generated in the key automotive industry month of March.
Lookers’ new car turnover increased by 3%, a credible performance in the context of data from The Society of Motor Manufacturers & Traders (SMMT) showing total new car market registrations down 2.4% to 701,036 cars in the first quarter, although on a like-for-like basis the group’s new car turnover and gross profit were flat year-on-year.
Manchester-headquartered Lookers’ used car performance was also strong with like-for-like sales 6% ahead and gross profit moving higher, while gross profit from higher margin after-sales revved up 6% on a like-for-like basis.
CAN LOOKERS KEEP ON TRACK?
Today’s trading update from Lookers, steered by chief executive officer (CEO) Andy Bruce, is reassuring given current car market volatility and the impact of Brexit uncertainty on consumer confidence, and demonstrates the ‘resilience and diversity’ of the business model according to management.
However, there is a more cautious tone to the comments around the second quarter, performance since March having been merely ‘satisfactory in the light of current trading conditions’.
According to Liberum Capital, ‘this alludes to what appears to have been a tougher April for new cars (SMMT data: private registrations down 10.3%). We think that some of the weakness in April may be Easter timing related. We do not have the data for May yet, but we think that a strong June will be required in order to keep the company on track.’
The broker also highlights some comments in the trade press flagging up used car price weakness. ‘While this may be an anomaly, it is something to keep a close watch on’, cautions Liberum.
SECOND QUARTER CAUTION
‘While there is much to play for, we think the tougher quarter to date, combined with Brexit uncertainty going into the next big trading month of September for new cars, means that the risks to estimates are modestly on the downside,’ explains Liberum.
The broker is sticking with its ‘buy’ rating, highlighting property backing of £303m and the motor dealer’s ability to take market share via organic and acquisitive means, yet it downgrades its full year 2019 pre-tax profit forecast by 5%. This is to reflect ‘a tougher start to the second quarter, particularly on new cars. With continued uncertainty around Brexit, we think that a more cautious stance is valid. The longer-term thesis is unchanged: those businesses with the strongest track records and balance sheets will consolidate the market and drive higher returns.’
Lookers is among those businesses, but the market continues to discount the negative industry noise. Based on Liberum’s lowered full year estimates of £55.1m of pre-tax profit, earnings of 11.4p and a 4.1p dividend, the shares are languishing on a single digit prospective price-to-earnings (PE) ratio of 7.6 with a chunky 4.7% dividend yield.
