Lookers valuation 'extreme', says Liberum
By Michele Maatouk
Date: Wednesday 26 Jun 2019
(Sharecast News) - Lookers' valuation looks "extreme", Liberum said on Wednesday, a day after the car dealership's shares tanked on news of a Financial Conduct Authority investigation into its sales processes.
The broker pointed out that Lookers' "already weak" share price fell more than 20% and is now trading on 4.7x 2019 price-to-earnings estimates.
Liberum said that its understanding is that there is no 'miss-selling' issue here and no issue with the personal contract purchase product itself.
"This is about Lookers' sales processes. Management has a plan in place to address the issues," it said.
"We think that the fact that Lookers shared its review with the FCA should work in its favour in terms of the level of any remedies. The range of fines that the FCA has implemented has been wide...and we do not see any easy way to identify a precedent, given the lack of details.
"Our sense, historically, has been that Lookers, along with other listed motor retailers, has been at the better end of the spectrum in terms of anticipating FCA requirements. With the FCA already reviewing practices in motor retail, we think that there will be broader changes in the market, albeit we have no reason to read-across from Lookers' statement to other listed peers."
Liberum said the stock's valuation is now "extreme" even if there is a material penalty to pay. It rates the stock at 'buy' with a 119p price target.
Lookers shares crashed on Tuesday after it said the FCA was launching a probe into its sales processes between 1 January 2016 and 13 June 2019.
"The FCA investigation is newly commenced and no findings have been made," it said. "The FCA will reach its conclusions in due course and, at this stage, the company cannot estimate what effect, if any, the outcome of this investigation may have."
Back in December 2018, Lookers commissioned an independent review of its internal control, risk assurance systems and internal audit. The review, which it shared with the FCA, indicated that there were "some control issues" in its sales practices which required an improvement plan to be implemented.
"We have invested in both our internal capabilities and external advice. The project will be completed and agreed actions will be implemented as soon as possible," Lookers said on Tuesday.
Peel Hunt, which rates Lookers at 'buy', said: "Clearly, there will be no surety of outcome until the FCA has completed its investigation, although administration issues (which we understand are likely to have been corrected) should be less material than more substantive failings.
"The shroud of an FCA investigation will no doubt loom over the shares in the short term, which now trade on just 5x PER, already subdued from Brexit concerns."
At 1230 BST, Lookers shares were up 0.4% at 53.70p.
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