Extraordinary times in the car market are generating extraordinary investment opportunities. Yesterday the Society of Motor Manufacturers and Traders said new car sales last month fell by 20.6 per cent to 124,394, taking sales so far this year nearly 37 per cent down on the 1.04 million sold in the first five months of 2019. A big reason is a lack of parts, thanks to global supply-chain headaches.
As far as demand goes, Auto Trader says that a fifth of all models under a year old are selling at or above the recommended retail price for the new versions, including VW Polo, Ford Puma and Mercedes-Benz-A Class, and they are typically being snapped up in a month, against an average of 52 days a year ago.
This sort of volatility is meat and drink to any trader, especially one that, like Lookers, straddles the market. New cars delivered a quarter of its total gross profits last year, with volumes rising by 4 per cent despite showrooms being shut in the early months because of the pandemic.
Through its trade names Charles Hurst, Lookers and Taggarts, the company deals in brands including Renault, Ford, Citroen, Audi and Mercedes-Benz, taking in Land Rover, Jaguar, Volvo, Peugeot, Nissan and Hyundai.
Lookers has had steep ups and downs of its own. Two years ago, while preparing its 2019 accounts, the company discovered “potentially fraudulent transactions” at an outlet. Pre-tax profits had consequently been overstated by £25.5 million, no small beans for a business that had declared only £53.1 million pre-tax profit for 2018. The Financial Conduct Authority has closed the case, with no blame attaching to the top management. Nevertheless, the episode unsettled shareholders.
Fast forward to this January and Lookers shares jumped from 69p to 99p, the price at which the acquisitive Constellation Automotive, the owner of Cinch and We Buy Any Car, announced that it had bought a 19.9 per cent stake.
All this against dislocation in the vehicle market. Cars on the road are older than ever as drivers make do and mend what they have. The average UK car is 8.7 years old, a year older than in 2011. More than a quarter date back more than a dozen years. The reasons are well-rehearsed: surging fuel prices, supply bottlenecks, fewer new vehicles on sale and a squeeze on household budgets. Lockdowns in China have led to a microchip scarcity that could last years, slowing car production.
As with so many companies, 2021 was exceptional. Revenue rose from £3.7 billion to £4.05 billion, the group sold 173,000 cars and commercial vehicles, up 9,000 on 2020, and underlying pre-tax profit was £90.1 million against a restated £13.7 million. That sent earnings per share from a 1.18p loss to a positive 15.65p. Profit margins rose from 11.1 per cent to 12.8 per cent and a £40.7 million net debt was replaced by £3 million cash in the bank. Lookers’ new car registrations rose 9.7 per cent compared with 7.4 per cent for the market as a whole.
Analysts do not expect that to be repeated this year, forecasting that used-car prices will plateau, squeezing margins back down, while galloping energy charges may cause many consumers to postpone big purchases until next year. But the growing popularity of electric vehicles may help to counter that sales lag.
Ed Legget at the Artemis UK Select fund expects “the mismatch between supply and demand in both the new and used-car market to offer a favourable trading backdrop for the business”. The broker Edison sees pre-tax profits settling back at £53 million this year, rising to £60 million in 2023, and it expects the dividend to grow from 2.5p a share to 3p for this year and 3.3p next. That would give an attractive 7.2 p/e ratio and 3.8 per cent yield.
Advice Buy
Why Capable of making the most of existing market opportunities, with the possibility of a takeover bid from Constellation
B&M European Value Retail
When a company appears to break faith with its followers it is never easy to repair the damage.
That is the problem facing the B&M cut-price food, grocery and general merchandise chain since the Arora family disclosed in January that they had sold a 4 per cent stake, worth £234 million. And last week Simon Arora, who founded the business with his brothers, said he will retire as chief executive in April.
After a huge upward roar from the beginning of the pandemic in March 2020, the shares have been tumbling since last December, down from 634p then to their present 385p.
The Aroras still have 7 per cent of B&M, worth £273 million, but their 180-day commitment not to sell more expires on July 17, which might herald more nervousness.
The broker Peel Hunt summed up the market’s concern: “B&M is an impressive machine, but even the best machines splutter when the driver changes, and the loss of Simon Arora is significant, no matter how worthy Alex Russo is.”
The Arora family has every incentive, though, to steady the ship. Simon Arora is not going until next April and Russo, his replacement, has abundant retail experience with Walmart and Tesco.
Simon hardly soothed investors’ jumpiness with a remark that “spending behaviour in the year ahead (is) difficult to predict”.
He was unveiling unchanged £525 million pretax profits for the year to March 26 after sales fell by 2.5 per cent to £4.67 billion.
Although the group is taking a first step online with garden furniture and some more affluent shoppers may trade down to its outlets, the fear is that many of its mainstream customers will head to food banks.
Nevertheless, its 11.8 per cent operating margin is more than double that of Tesco, which leans more heavily to food.
Investec’s Kate Calvert sees earnings per share growing to 41.7p for the year to March 2024, only an 11th of the share price and plenty of headroom for a continued 11p annual dividend to give a 3.6 per cent yield.
Advice Buy
Why The share price fall has been overdone
