Pendragon navigates a more profitable route

Car dealership group Pendragon (PDG) appears to be heading in the right direction after embarking on a sharp turnaround last year when the business looked hopelessly lost.

After walking away from merger talks with Lookers (LOOK), the Nottingham-based company began culling loss-making sites in the UK and changed its operating model, laying off about 1,800 staff in an attempt to reduce overheads. It also put the remainder of its US dealership assets on the block.

The result of these actions meant that it declared its first half-year profit in three years.

Pendragon has been helped by a buoyant car sales market, from which it earns more than 90 per cent of its revenue. New car registrations in the UK rose 20.3 per cent in the first eight months of the year, according to the Society of Motor Manufacturers and Traders.

Showrooms were once again affected by Covid-19 lockdowns, with most remaining closed between January and 12 April, but its improved digital sales channels (it delivered 40,000 cars during lockdowns) and the slimmed-down estate meant it converted an underlying loss of £31m in the first six months of last year into a profit of £35.1m.

The company’s UK franchises sold more than 30,000 new cars, a like-for-like increase of 43 per cent on the same period last year. Like-for-like used car sales were up 38 per cent, with more than 48,000 units shifted.

These sales, as well as an improvement in working capital and contract hire vehicle movements, meant it generated almost £115m of cash from operations, the bulk of which was used to pay down £110m of net debt, improving its balance sheet.

The closure of 54 lossmaking UK sites (bringing the total to 150) and the sale of its last two US dealerships saw it trim about £75m of underlying costs compared to the same period in 2019, sacrificing just £24.1m of gross profit in the process, chief executive Bill Berman said.

When setting out its new strategy last year, he set a long term target of growing underlying pre-tax profit to £85m-£90m by 2025. Pendragon reiterated guidance that it expects a full-year profit of £55m-£60m this year, despite short-term headwinds due to supply disruptions caused by chip shortages and potential further Covid closures.

The results indicate the new strategy "is having a demonstrable impact”, said Andrew Wade, an analyst at Jefferies. He has a share price target just below its current valuation of 19p, based on estimated earnings per share of 2.1 and a price-to-earnings ratio of 9. The consensus target is higher at 28.5p, but given the potential for disruption to car sales and the scale of the company’s liabilities (most of which are trade debts), we cautiously upgrade to Hold.

Last IC View, Sell at 7.8p, 06 May 2020.