Lookers ready for comeback

The group’s first-quarter numbers showed a 4 per cent decline in new car sales, but this was significantly better than the wider market, which fell 12 per cent over the same period. Elsewhere, used-car sales grew by 8 per cent – which helped used-car gross profit to rise 6 per cent – while aftersales, Lookers' most profitable segment, also remained resilient. Worries about residual values in used vehicles don’t seem to have materialised at Lookers. Its bosses say residuals are holding up thanks to good demand, even for diesel cars. The fact that City analysts expected this to be a tricky quarter for the group also helps explain the shares’ positive response. Even better, this performance – coupled with the improving market backdrop – means Lookers is solidly on track to meet first-half, and even full-year, expectations.

The group also completed sale-and-leaseback deals on two properties in the opening quarter, which generated £30m. Not only has this significantly improved immediate cash flow, but net debt could finish the year lower than it started. Management could therefore find more flexibility to take advantage of what remains a highly fragmented market and pursue more acquisitions. It also helps the dividend look a little more secure, which, on a forecast basis, offers a yield of around 4 per cent.

But Lookers' share rating is also likely to reflect broader concerns over the UK car market, especially as consumer confidence remains fragile. There is also growing scepticism over the long-term feasibility of personal contract plans (PCPs) – the consumer finance side of the industry. But analysts at Peel Hunt say that PCPs – basically leasing contracts – help regulate demand and are simply a favoured mechanism for customers to buy cars. Sterling's weakness may be a factor too. But assuming the pound continues to recover against major currencies, then the finance arms of motor retailers and manufacturers could come up with more flexible products again.