Small Cap Value Report (Fri 1 Nov 2019) - LOOK, CAR, XSG

1st Nov '19 by Paul Scott

25 comments 5730 reads

Good morning, it's Paul here with Friday's SCVR.

I'm writing this from a gently swaying yacht, moored in a marina on the outskirts of Valletta, Malta, which I've rented for 3 days via AirBnB. It sounds very grand, but is only costing 100 Euros per day, I'll post a picture or two later on Friday. It's amazing the quirky things you can find on AirBnB. The great thing about shares analysis & investing, is that all you need is a laptop and wifi, and you can work literally anywhere on earth.

Estimated time of completion - it's Friday, and I'm sort-of on holiday, so let's see how we get on. I should have something decent up by 1pm, but reserve the right to add more sections in the afternoon if anything interesting crops up on the RNS. Update at 09:28 - not much to report on today, so this should definitely be done by 1pm. Update at 13:03 - today's report is now finished.

Lookers (LON:LOOK)

Share price: 42.7p (down 14% today, at 09:30)
No. shares: 389.2m
Market cap: £166.2m

Trading Update & Board Changes

Lookers plc, ("Lookers" or "the Group"), one of the leading UK motor retail and aftersales service groups, issues its trading update for the period ended 30 September 2019 ("Q3" or "the Period").

Note that the company has a 31 Dec year end, so this is Q3, not a full year.

Trading has deteriorated further;

As reported in the Group's interim results statement trading during the six months ended 30 June 2019 ("H1" or "first half") was challenging. This was driven by ongoing weakness in consumer confidence in the light of political and economic uncertainty, pressure on used car margins and retail cost inflation. The Board expected these conditions to continue to impact the Group during the second half, but trading, particularly over recent weeks since mid-September, has been much more challenging than expected.

Car dealers have 3 profit generators - new cars, used cars, and after-sales (servicing & warranty/recalls)

New cars - OK up to mid-Sept. "Much weaker than expected" in 2nd half of Sept (a key month for profits). Also experienced margin pressure. Total profits £7m below last year, for Q3.

Used cars - Sounds OK. LFL unit sales accelerated slightly to +2.6% y-on-y, from +2.0% in H1. Gross margins improved on H1, not quantified, so…

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Edward John Canham

1st Nov '19

Seems a pretty quiet day.

The only thing that caught my eye was Lookers (LON:LOOK) - obviously a bad result, but I have been pondering opening a position in a car retailer. Reflecting the sector, PER's are pretty low and yields are good. Some have good asset backing and good management which seem to be working very hard just to keep profits flat or slightly down - both
Marshall Motor Holdings (LON:MMH) and Vertu Motors (LON:VTU) seem worthy of consideration.

Wondered if people think we have seen or are close to the bottom here.

Phil

rmillaree

Lookers (LON:LOOK)
I am the resident car dealer skeptic around here, i love a decent deep value play and there is a lot to like about the car dealerships with the nice tangible book values and cheap pe's- my opinion though is that times are changing electric cars have less moving bits and in some respects the in house software as a service and constant in house vehicle monitoring is the way to go (Tesla). I don't think any of these dealerships make more than 1% bottom line profit based on sales so if they are continually squeezed going forward or pushed out of some tie ins they have i think its more likely than not that they may find it hard to make any meaningful profit - its difficult to say though whether there will be change anytime soon - i just prefer not to take the gamble if i have doubts that the company can be squeezed out of business due to circumstances beyond their control.

With regard to share prices of these companies i would guess the wild fluctuations in shareprices may continue as the bad news good news bad news bad news nature of the business must make it hard to value any of these companies with any confidence. Just look at Vertu 40p to 32p and back to 40p all in 6 months. Lookers halved in value then up 25% from lowpoint and now back down to the bottom now. As a gamble i could easily see one doubling ones money if one time it right so i guess you pay your money and take your chance.

catalogue

Why single out the motor trade when asking the question are we close to the bottom? One could be forgiven for asking why the FTSE All share is only 5% off its 52 week high.

Hong Kong plunges into recession
Begbies Trainor claim
- Number of businesses in significant distress now 489,000 – an increase of 22,000 since Q3:2018
A forthcoming election where the results are unpredictable
The November 7 forecasts will only provide its public finance baseline forecasts and will not provide a full economic and fiscal outlook, which would have been published had the November 6 Budget not been scrapped.

JohnEustace

I think new car sales to private customers have been propped up by people rolling their PPI payouts into car deposits. I drove past my local Audi dealership yesterday and saw a banner outside saying "Have you received a PPI payment, come in and talk to us".

So perhaps the one scandal is actually feeding into the next.

Steves cups

Hi
Off topic I know but did anyone else notice the non appearing Q3 update RNS fom Royal Dutch Shell (LON:RDSB) yesterday?

Steve

SundayTrader

re Lookers (LON:LOOK), I am not sure of the impact of a "mis-selling" investigation on them. Garages aren't banks, they process the loan applications, acting as agents for the bank providing the loan. Where does the mis-selling liability fall? Presumably if garages were to be held liable, they would stop offering loans and start passing customers on to the shop round the corner - surely garages don't have the margins to support those sort of risks?

fwiw, I don't hold any garage businesses, and I think the downward leg of the cycle has longer to run.

Thanks all - I guess that's a no then!

(Have to admit I'd forgotten the FCA bit - don't like the uncertainty this brings.)

Phil

Laughton

re Lookers (LON:LOOK) - "Wondered if people think we have seen or are close to the bottom here"

Don't they say that profit warnings come in threes (and I think this is only number two)?

And then doesn't the new top man always kitchen sink his first trading update or set of accounts? Maybe a bit more downward price action to come before I think of hopping aboard this one.

Having said that, I do hold a few Marshall Motor Holdings (LON:MMH)

Hello Sunday Trader

ref mis-selling and Lookers (LON:LOOK) - i would guess its a transparency thing - last time i bought property i used recommended solicitors - their fixed fee was decent - it was upfront though that it may clear what commission was being paid across to referrer.

If the garage is earning huge commission payment that is not disclosed to the car buyer and it turns out the car buyer is paying more interest and fees than they could have got elsewhere due to that fat commission cheque its not exactly transparent and probably not in the best interests of the car buyer if the salesperson is setting us such a scenario to benefit "themselves".

I am guessing the fact there are active investigations ongoing means there is real risk here that there may be some way for the authorities to clobber these car companies in a similar way to how they clobbered the payday loan companies.

JamesGray

With regards to Lookers, I would say that the universe has a way of repaying what has been sown. They are only interested in making money, and have no conscience. I feel sorry for any shareholders in this company.

-1

shipoffrogs

RMillaree - I find it hard to believe that Lookers could be deemed to be over-charging their customers. If their margin drops by less than 1% of revenue they'll be losing money.

Beginner

It came out at 0700:

https://www.lse.co.uk/rns/RDSB/royal-dutch-shell-plc-3rd-quarter-2019-unaudited-results-ilq4srkdqs1xl55.html

It did not show up on Investegate, for some reason.

derekwb

Paul

hope you didn't get wet in the thunderstorm - you can also get me on my mobile 00356 9980 5137.

Derek Broadley

Thanks
Nor on stocko nor on LSE RNS feeds

FREng

I have just noticed that Mercia Asset Management (LON:MERC) is up 10% today on high volume but no visible news. Does anyone here know why?

EDIT: I think it's still a Woodford holding so there may be some placement to another big investor happening. The trading history on ADVFN shows some very large single transactions (a few million shares at a time).

woodcub

Simon Thompson (of IC) wrote a very positive article yesterday on £MERC, calling it an unwarranted sell down (due to the Woodford overhang), so this may be something to do with it. He thinks the sum of the parts valuation is £146m, that is 48p a share, and he rates it a bargain buy.

harrinr

It's was given a good write up in Investors Chronicle by Simon Thompson yesterday

MacBoyUK

3rd Nov '19

Car dealers also have a fourth stream: finance and leasing.

Paul Scott

Good point. Presumably that's included within the new cars segment though?

4th Nov '19

Sales are hard to come by but isn't it the finance and leasing side that's causing the current concern?

From the company's June RNS:-

"The Company has now been informed by the FCA that it intends to carry out an investigation into the Company's sales processes between the period of 1 January 2016 to 13 June 2019"

Small Cap Value Report (Fri 1 Nov 2019) - LOOK, CAR, XSG

Lookers (LON:LOOK)

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Paul Scott

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