What prospects for share growth at LOOKERS PLC

3rd Apr '20 by Strikeoil247

7 comments 332 reads

I am totally perplexed by Lookers PLC Fundamentals v current share price (as of 3 apr 2020)

Float 390mil shares x £0.154/share = Market Cap £60million

Consider 2018 and 2019

After tax 2018 = £43.5mil or 43.5/390 = £0.11 EPS, hence P/E= 0.154/0.11 = 1.4

Balance 2018 = Net Assets £399mil hence P/BV = 60/399= 0.15 ie safety margin 85%

Of this £231mil intangible assets which I subtract to give £399-231= £168mil

Lookers owns £350 mil of property of which £210mil freehold and rest leasehold - hence liquid assets

After Tax 1st Half 2019

£25mil and expect at least £10mil 2nd half = 35/390 = £0.09 EPS, hence P/E= 0.154/0.09 = 1.7

Balance 2019 = Net Assets £399mil hence P/BV = 60/399= 0.15 ie safety margin 85%

Of this £231mil intangible assets which I subtract to give £399-231= £168mil

Lookers owns £350 mil of property of which £210mil freehold and rest leasehold - hence liquid assets

Worst Base case valuation

If Book value £60mil, and net assets £168mil then share price should be around 0.154*(168/60) =£0.43

Pre crash brokers recommended between £0.45/0.60 share price based on 2019 lower trading volumes.

Even if 2020 Profit After tax is just £20 million / this would give P/E of 60/20 =3 (well below automotive market average)

and EPS of 20/390 = £0.051

Lookers is expected to pay 1.48p/share interim dividend in 2020 = just under 10% -even if no final dividend

Strong support level at 15.4p.

THIS STOCK SHOULD BE SHOOTING UP BEING BOUGHT BY VALUE INVESTORS - BUT IT ISNT!

ITS ALSO A POTENTIAL TAKEOVER TARGET WITH BREAK-UP VALUE OF £168MIL V TODAYS MARKET PRICE OF £60MIL.

My analysis for this is as follows:

1. Little known and unpopular stock

2. Low daily traded share volume (average 1mil daily out of 390mil float) - leads to wide quoted bid/offer spread

3. Company lacks investor sex-appeal -being just a boring mundane Buffettian low tech company which sells new and used cars and car parts.

SOS - can some Stockopedia guru pls urgently vivisect this company´s fundamentals to come up with an accurate fundamental analysis and risk profile - in case I have missed something before this stock skyrockets.

My sources of information are :

https://www.londonstockexchange.com/

http://www.lookersplc.com/investors/results-centre/

https://www.hl.co.uk/shares/shares-search-results/l/lookers-plc-ordinary-5p-shares/financial-statements-and-reports

POSTED ON STOCKOPEDIA AT 22.00 GMT ON 3 APR 2020

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Strikeoil247

3rd Apr '20

Comments, stock vivisections, risk analyses and constructive comments welcome.

xcity

How about reading Paul and Graham's reports from last year?
I don't know Lookers, but I'd caution against taking car distributors' land values too literally unless you know the properties in question. Sometimes they're good, but sometimes not. If the whole sector is sinking, will the valuations hold?

timarr

4th Apr '20

It's an interesting bit of analysis. As of their recent update they have net debt of £62 million, a £250 revolving debt facility and a property portfolio valued at 81p a share (£317 million - note that suggests less shares in issue than Stocko lists but I'll go with the company's number). So it looks cheap.

However, we have to assume near zero earnings in the near term. Car dealerships make thin margins at the best of times, cars are the first discretionary purchase to be scrapped in a downturn and the vast majority of their revenue is in car sales. At the moment their only effective outlet is Auto Trader (LON:AUTO) or their website and a service centres. Let's call it zero, for simplicity's sake.

In the event of a fire sale it's not clear that the underlying assets will be worth the current valuation. In particular I'd expect significant markdowns on commercial property valuations in the next round - although car dealership sites do have residential property development potential so they're not without some value. But (say) a 30% haircut on the asset value in a crisis and you get (roughly) net assets of around £159 million.

Last year they paid about £25 million in interest on their debt (we'll come back to that) - so assume that still gets paid this year - and we're down to £134 million. A lot of their fixed costs will now be on hold - so the government will pay furloughed workers, VAT can be conserved and business rates aren't required. Their net operating expenses last year were £443 million - let's be generous and say that can be slashed to a quarter - so £110 million. For simplicity (I'd rather be roughly correct than precisely wrong) let's say £10 million a month.

That would say that they would be increasing debt and reducing net assets at £10 million a month. Which means that they can go 19 months without raising more capital and their premium to asset value will have gone in 16 months. Well, if the country is still in lockdown by then none of us will have a job to go back to.

One final point is around the interest of £25 million paid. I have no idea what the interest rate there is but assuming something as low as 2.5% that would suggest the average debt over the year is around £100 million not the £62 million listed. Companies try to manage their cash receipts around their reporting dates but you can't hide the interest. However, a lot of that will be cash flowing in and out of the business to their franchise owners, so it's hard to be sure where the true debt position lies. I'd suspect it's somewhere higher than £62 million .

Very quick finger in the air assuming a three month shut down and I'd say the underlying net assets value would be around £65 to £80 million in 3 months time and the net assets per share around 17p to 25p. Given the uncertainty in the market I'd say they're priced about right at the moment and there's probably not a large enough margin of safety for them to be interesting.

However, we also need to think about what happens when the lockdown is lifted and government support ends. It's hard to believe that demand for cars will immediately return to pre-Covid-19 levels - and given their already thin margins it's at least plausible that Lookers will find itself continuing to make losses month on month for some time to come. That's quite a grim prospect.

Given the number of assumptions here I could easily be out by a factor of two either way. I may have missed significant things on the downside - pension contributions possibly - and the upside (lease payments, internet sales). But it's instructive to think about the problem given the challenges in figuring out fair value right now.

And as for what the share price will - who the hell knows? Prices are being driven by fear and sentiment, but someone may value the property sites sufficiently highly to make this look like a bargain. But they certainly look better value if you assume they shut down or get taken over now and sell off the property than if they keep trying to run a proper business.

Who'd be an investor, eh?

Thanx for the constructive devils advocate & value vivisection. That's exactly what I needed - a worst case valuation review. However since Lookers own £210mil freehold property (not land) and has bounced off support level - will spend 2% of my money on it /then wait and see. Lezz touch base again in a few months.

videoman

Thanks for the in depth figures from this company and as a new investor I find your explanation of the figures most helpful.

I used to deal with Lookers on a business level with my previous employment and used to deal with their senior buyer at head office in Oxford. I always found them to be very prudent and careful with money and everything had to be cost effective (cheap) before they would spend if you wanted to do business with them.

Zipmanpeter

As per Nov 1 2019 RNS: "As announced on 25 June 2019, the Group was informed by the FCA that it intends to carry out an investigation into legacy sales processes between the period 1 January 2016 to 13 June 2019. Following discussions with the FCA in October, that investigation has now commenced and is in its initial planning and fact-finding phase. The Group continues to fully support the FCA in its investigation but, at this stage, we are unable to predict what, if any, impact the outcome of the investigation may have."

and : "On 10 March 2020, due to the discovery of some potentially fraudulent transactions in one of its operating divisions, the Group announced a delay to publishing its financial results for the year ended 31 December 2019."

The FCA (Financial Conduct Authority) are I think still looking at Lookers/car market and could issue fines/mandate changes in practice. At best this has cost time /money to address with an ongoing £ charge. It also seems to have unearthed other accounting issues (see quote 2) as new people have come in and stones turned over. This may speak to wider culture issues.

What's more, there were sales issue even before corona virus - see interim results

Personally, I think there will be long term last man standing value in car dealersand through their book value but there are other, less risky (but still very risky!) plays eg £VTU. Even the book value is only very long term since there will be a lot of sellers of land assets in near term and few buyers.

However since Lookers own £210mil freehold property (not land) and has bounced off support level - will spend 2% of my money on it /then wait and see. Lezz touch base again in a few months.

Fair enough. I reckon if you invest in a portfolio of things like this you'll do OK on a two year view. But equally there's got to be a good chance that some of them will go bust - which will obviously improve the situation for those left in business.

And as zipmanpeter point out, and I forgot to mention, there is an FCA investigation underway. Although I doubt very much they'll do anything so severe that they'll put Lookers (LON:LOOK) out of business, that would be crazy given that the government is trying to keep everyone employed.

Good luck!

What prospects for share growth at LOOKERS PLC

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Strikeoil247

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