Lookers Plc (lon:look)
Lookers – Shares Reinstated, So How Do They Look?

Financials

ItemCurrent PeriodPrevious Period
Year20202019
Period6 Months6 Months
Revenue£1563m£2605m
Earnings
Adjusted Earnings
EBITDA
Adjusted EBITDA
Statutory Profit(£50m)£20m
Adjusted Profit(£36m)£22m
Total Debt
Net Debt£11m£71m
Commentary
Title: Lookers – Shares Reinstated, So How Do They Look?
Company: LOOK - Lookers Plc
Share Price Then: 38p
Author: Ian Smith
Date: Tue 09 Feb 2021
Comments: After almost 7 months Lookers share have been reinstated, what started out as a minor concern about a bit of fraud escalated into a major financial issue.

On the 24th of April 2020 these issues were expected to give rise to a one-off, non-cash charge in the 2019 financial statements of circa £4m, they ended up at £21.8m going back over three years.

About £2.8m was out and out fraud with the rest being incorrect accounting practices. It is not clear to me how much of the accounting issues were errors and how much was deliberate playing with numbers to meet targets.

By the time that the shares were reinstated the bad news had pushed to price down to close to 11p from a long term price of around 110p and are at 38p today.

So where does this leave the business?

After such a hopefully thorough investigation it does seem likely that all the dirty secrets have been uncovered, but it is dangerous to be too certain about this.

Lookers are still one of the biggest dealer groups, operating in a heavily covid restricted market.

One upside has been the increase in use of fixed term purchase/hire agreements, many of these cars may have been mostly idle during lockdown and in the past the lack of mileage may have tempted owners to keep them for another year.

More sites and people have gone with the closure of 12 sites and a total of 1,500 redundancies across the Group.

The number of sites doesn’t worry me as the group still has 140 but the number of people does, even taking into account the total number of closed sites, 27, it does make me wonder is either too many have been lost or their roles are still their and are being performed by temps.

Although of questionable reliability the net book value of freehold and leasehold properties is £314m or 80.4p per share.

We have seen the value of shopping centres crash so I would be cautious about this valuation, but most car dealerships are pretty easy to knock down and build houses on and are often in locations where this would not be too out of place.

I am concerned that both covid and BrExit are going to have a significant impact on employment, but at the moment how many of those worse affected were going to be in the new/nearly new car market is much less clear.

I am also not a believer in long term work from home, having done it for over 20 years I have seen the effect it has long term.

A while back I was concerned about electric cars and one manufacturer taking a dominant lead, this doesn’t seem to be happening.

So for me it is really a question of can the company survive the depressed car market?
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Share Commentaries, their purpose.




Previous Commentaries On Lookers Plc
Date Share Price Author Commentary
Wed 01 Jul 202021pIan Smith

Lookers – Suspended As Expected.



As expected Lookers have suspended their shares in order to complete the 2019 audit.

No expected date was announced for reinstatement beyond when the results are published.

Given that the previous accounts were signed off and the current auditors are resigning there doesn’t seem to be any reason to believe that they will be published in the next few days.

Deloittes have been Lookers auditors since 2006 and as the company’s shares have been suspended I suspect that a certain amount of backside covering will be going on.

I am still optimistic but I also felt that things couldn’t get any worse for companies like NMC, Patisserie Valerie, Finablr and the list could go on.
Tue 30 Jun 202019pIan Smith

Lookers – Its Looking Worse Than Previously Thought



The core selling cars business has looked decent although heavily affected by COVID-19 and I was thinking have they been oversold.

Then on the 10th of March 2020 it was announced that the accounts were going to be delayed until the second half of April as a result of some non material issues and Grant Thornton would investigate them as fraud.

On the 24th of April these issues were expected to give rise to a one-off, non-cash charge in the 2019 financial statements of circa £4m.

On the 4th of June the fraud investigation was nearly complete and the accounts would be ready by the end of June.

On the 8th of June the accounts would not be ready by the end of June and share trading may have to be suspended on the 1st of July. Deloittes stated their intention to resign as auditors after the publication of the 2019 accounts.

On the 29th of June the Grant Thornton report says there is £19 million of adjustments roughly half applicable to 2019 and the rest to previous years

As well as the £4m found earlier there is £15m related to the incorrect or inconsistent application of policies, processes and accounting standards. That is meaningless to me and the audit of the 2019 accounts is still incomplete.

However, the Board believes that 2019 will remain profitable at the underlying profit before tax level.

So is there a big buying opportunity here, with shares currently at 19p valuing the group at £75m and a suspension of the shares apparently due should anyone buy on the expectation of a significant rise the day that the shares are restored.

If there is £19m of lost cash then this would seem unwise.

But if most of the £19m can be treated as misstatements and there is minimal amount of money expected that is not going to be received and none to payout then under normal circumstances this could be an interesting decision. The problem is that there are many other weakly priced shares that will not tie your money up in un-tradable shares.

I have been burnt in the past thinking that all the bad news is out there.
Thu 04 Jun 202025pIan Smith

Lookers – Positive Trading Update



LOOK – Positive Trading Update
Lookers have just released a trading update after the re-opening of its dealerships on Monday 1 June and it seems quite upbeat.

With the benefit of enhanced online functionality which the business has been implementing, in the last two weeks, the Group has taken retail orders for 2,865 new and used vehicles which on a like-for-like basis represents approximately 51% of sales for the same period last year
Given that buying cars can’t be that high on many peoples to do list this seems like a pretty good number, suggesting that demand is still there and when people can access vehicles more readily getting back to last year’s volume could happen quite quickly.

The Group had approximately 66% of its total current colleague base (c.8,100) remaining on furlough at the end of May. In June it is expected that this will reduce to approximately 55%.
With furlough payments being withdrawn and demand apparently recovering this seems to say that most people will be back to work at roughly the same time as demand recovers.

Although all of these numbers are terrible in an absolute sense, they seem to me to suggest that the business is still solid and unless there are some loans hidden somewhere that would allow someone with a secured loan to take advantage any new needs for funds should be easily resolved.

The downside is that there are some cutback, since Nov 2019 the group has decided to close 27 dealerships leaving it with 136 this doesn’t seem too bad

They are now looking at losing 1,500 jobs, they seem to have around 7k-8k at the moment, how do you lose that many people? It is possible that control got lax and there a few jobs that could go at each dealership and head office.

Net debt of £57m at the end of May with a facility of £250m and property portfolio with an adjusted net book value of £325m at 31 December 2019
The group’s property portfolio is valued at 83p per share although the value of every businesses’ property has be questioned at the moment, also it is not clear what the borrowing are.
They seem to be a significant bit over £100, the reports often talk about net debt and the group seems to keep around £50m of cash. If the proceeds of planned property sales are mostly used to reduce debt this would be positive as interest on the debt seems to be quite high at around £15m a year.
So a fire sale of the property might yield £200m, £100m plus would pay of debts leaving around £100m which is roughly the current market cap. Surely this suggest that the market doesn’t thinks that things are so bad?

We have used the time as the business has been closed to adapt and evolve to meet changes in consumer behaviour, not just for a post Covid environment, but also to enhance our digital offering and the trend towards electrification
Not quite sure what this means in concrete terms, but if it is substantial then good.

The formal results are now expected to published at the end of June.
Mon 01 Jun 202027pIan Smith

Lookers – After The Lockdown Are They Still Safe?



A while back I quite liked Lookers, they had a good range of franchises, owned quite a lot of land but had been punished a bit share price wise because of an FCA investigation.

As someone who has been following companies like NMC, Patisserie Valerie, Carillion, Kier, Conviviality and other similar businesses an FCA investigation is fine, only those seriously in trouble don’t get investigated :-), okay that is a bit of an exaggeration but…..

Clearly car sales will have been terrible on the back of COVID and this will have had an effect on retail customer confidence so not all sales lost in the shut down will be made when the showrooms first open but surely some will.

In the past the company has tried to move away from low margin fleet sales, whether this continues is unclear, as many company cars are on fixed length leases so those that have been idle for a couple of months will still be replaced.

Equally servicing will still be needed, and this may possibly be slightly more expensive if cars have been left idle, I didn’t notice the flat and now damaged tire or flat battery that now won’t hold a charge.

Jan/Feb 2020 saw a 4.8% drop in new car sales which was slightly better than the industry average suggesting that the group is still strong in the important brands.

Net debt was about £62m well short of the RCF limit of £220m which is due for renewal in March 2022, this certainly looks manageable.

There have been notifications of fraud but they are mentioned as non cash charges and the investigation is ongoing and the 2019 accounts are expected at the end of June. As the company put 7,000 staff on furlough wage costs will have tumbled, but until we then can’t really look at numbers.

So it a good buy now on the expectation that the drop to 60p around Jun 2019 is the right price, the drop after delaying the accounts is hard to evaluate as the drop in many companies was similar.

Freehold property is being sold off, I am not sure if this getting rid of no longer wanted property or part of a plan for sale and leaseback or a combination of both. In the short term £17.6m was received in 2019.