Value in Car Retailers? Lookers and Pendragon

Friday, Nov 11 2011 by
Value in Car Retailers Lookers and Pendragon

Looking for a sector that was unloved, I first thought of housing and I then thought of car retailers. Although the sentiment is considerably more bearish in housing, there were too many companies to write anything useful. For people interested in the sector, I would suggest the Society of Motor Manufacturers and Traders as a useful industry data source (industry-wide new and used sales are most useful). Obviously, I can’t really offer any insight but it is worth noting that the important September registration data was quite good (it usually represents about 17% of the total annual volume) and was down 0.8% from last September. The estimate for the full year is 1.9m new cars against 2m for 2010. However, even 2m was the second lowest number sold since 1995. We should remember that the first half of last year was unusually strong due to the scrappage scheme in March (some suggest that this added about 100,000 registrations). So the general view is that the market is improving but sales are still way down compared to anything in the past 15 years.

Lookers (LON:LOOK)

Lookers currently trades for around £200m. It has a new, used and aftersales divisions as well as a parts division (providing about a third of total profits). In 2010, the company achieved sales of £1.8bn with net profit of £23m, giving an earnings yield of 11.5%. Free cash flow was £18m, giving a FCF yield of 9%. The company has £60m of debt, a pension deficit of £23m and a cash balance of £30m. The company also has operating leases worth £88m. As always, the operating lease picture is somewhat complicated. The company appears to hold most of its property on long leases or freeholds but we also see some short leases under PPE. In addition, half of the operating lease commitments are due under five years which suggests quite a short maturity. Either way, the company has a book value of £190m and so the company is quite conservatively financed. The company is therefore trading at just over book value and is backed mainly by tangible assets.

The company is a much larger part of the new, as opposed to used, car market but the company is growing share in both. In addition, the company has added franchises to existing sites which is a neat…

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Lookers plc operates as a motor retail and aftersales company in the United Kingdom. The Company operates through two business segments: motor distribution and parts distribution. The motor division consists of over 150 franchised dealerships representing over 30 marques from approximately 100 locations. Aftersales represents the servicing, repair and sale of franchised parts to customers' vehicles. Its parts division operates in the independent aftermarket sector of the United Kingdom's motor retail market, where it operates through three operating companies: FPS, Apec Braking and BTN Turbo. FPS is a warehouse distributor of automotive parts. Apec Braking is a provider of dry braking (pads and discs). BTN Turbo is a distributor of turbochargers and supplier of related value added services. Its operations are also carried out across Ireland. It sells approximately 180,000 new and used cars and vans per year. In addition, it has an independent parts distribution business. more »

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Pendragon PLC is an automotive online retailer. The Company's principal market activities are the retailing of used and new vehicles and the service and repair of vehicles (aftersales). Its segments are Stratstone, which consists of its vehicles, truck and commercial vans brand, including the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities; Evans Halshaw, which consists of its volume brand, including the sale of new and used motor vehicles and commercial vans; US Motor Group, which consists of its retail operations in California in the United States, including the sale of new and used motor cars; Pinewood, which consists of its activities as a dealer management systems provider; Leasing, which consists of its contract hire and leasing activities; Quickco, which consists of its wholesale parts distribution businesses, and Central, which represents its head office function and includes all central activities. more »

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  Is LON:LOOK fundamentally strong or weak? Find out More »

1 Comment on this Article show/hide all

Robiwat 19th Nov '11 1 of 1

That's a good analysis from a lay perspective. There are as valuhunter observes between 7-8 million new and used car sales each year on a car parc of 31 million. The annual scrappage rate (cars coming to the end of their natural life or written off in accidents) is around 5-6% of the total parc 1.6m-1.9m cars. Fleets which account for half of new car sales replace cars on average on a four-yearly cycle, but consumers replace cars much less frequently (only 27% of current car owners expect to replace a car in the next three years) and replacement frequency is lengthening. While short term dealer profitability is influenced by new car sales, longer term profitability is dependent upon aftersales (servicing, parts and repairs). According to automotive analysts Trend Tracker, franchised dealers retain 80% of service business on new car sales but only 20% of service business on used car sales. Aftersales business is falling due to longer service intervals, reduced service content and increased vehicle reliability. To offset the decline in aftersales volume, franchised dealers have been increasing hourly labour charge-out rates but at around £100 per hour currently, there is a limit to how far that can continue. On average, franchised dealers sell one used car for every used car they sell. To be more profitable they must retain a higher proportion of aftersales on their used car business.

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About valuhunteruk


I'm a private investor based in the UK. I run Valuhunteruk a value investing blog started in March 2011 which is a continuation of a private blog I have been running since mid-2010. I publish the research and key ideas behind my decisions and the performance is tracked in a portofolio. more »

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