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JPMorgan Cazenove downgrades Lookers amid cost inflation woes

By Michele Maatouk

Date: Thursday 21 Mar 2019

JPMorgan Cazenove downgrades Lookers amid cost inflation woes

(Sharecast News) - JPMorgan Cazenove downgraded its recommendation on car dealership Lookers to 'neutral' from 'overweight' and cut the price target to 98p from 129 on Thursday, highlighting the problem of cost inflation.
The bank noted that Lookers' FY18 profit was in line with its expectations, but was around 12% lower after removing £7.7m of property profit.

"Since FY16 Lookers' gross profit has risen 15%, while operating profit (removing property profit) has fallen 6%, due to rising levels of overhead inflation," it said.

It said that while revenue in the used vehicle segment grew strongly, up 14% year-on-year, gross margin fell 85 basis points, such that gross profit was up only 1-2%. In addition, it pointed to £20.5m of higher costs year-on-year, with labour inflation being the largest single item.

On the upside, it said the stability of Lookers' earnings and margins continues to compare favourably to peers.

"Expectations for 2019 new car sales appear less negative than 2018, which we expect to result in stronger gross profit, offsetting ongoing cost inflation. Encouragingly, we note that capex is still expected to reduce from £27m in 2018 to circa £10m over the medium term."

At 1515 GMT, the shares were down 1.1% to 96p.

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