Lookers PLC (LON:LOOK) has rebounded from a five-year low as bargain hunters saw value in the car dealer as it became subject of a probe by the UK financial watchdog.
Shares in the company were up 7% to 57.45p on Wednesday, a day after falling to a low of 50.9p late on Tuesday when the London-listed group confirmed that the Financial Conduct Authority has begun investigating the company's sales processes between 1 January 2016 to 13 June 2019.
READ: JP Morgan downgrades car dealer Lookers on weaker used vehicle profitability
This came after Lookers itself notified the FCA after identifying “control issues in the sales process in the group's regulated activities”.
Car dealerships sell most of their new cars under personal contract purchases (PCPs), which are regulated by the FCA, but about which the regulator expressed some concerns in a report earlier this year.
The company said the FCA investigation “is newly commenced and no findings have been made” and, at this stage it “cannot estimate what effect, if any, the outcome of this investigation may have”.
Lookers has not yet made any financial provisions, though in December the directors acknowledged that there was “a possibility of financial liabilities arising”.
Analysts see value
Broker Liberum said the lack of provisions “suggests that a material remedy was not anticipated” and that “it is not a given that an FCA investigation changes this” albeit the 21% drop in the share price on Tuesday to 50.9p indicated that this is what the market fears.
“Our understanding is that there is no 'miss-selling' issue here and no issue with the PCP product itself,” Liberum said in a note to clients on Wednesday. “This is about Lookers' sales processes. Management has a plan in place to address the issues.”
The Liberum analysts added: “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.”
Although a series of cuts have had to be made to Lookers estimates after disappointing trading updates for the fourth quarter of last year and both the first and second of 2019, Liberum analysts said the share price valuation looks too cheap.
“Even if there is a material penalty to pay, the valuation looks extreme,” Liberum said.