Pendragon's revenues ride higher on supply constraints

Pendragon (PDG) shares lost almost a third of their value after Swedish car dealer Hedin Mobility, its biggest shareholder, pulled the plug on a £400mn takeover offer in December. The motor retailer, which makes most of its revenues in the used car market, is now trading at around a 12-month low. And the company has come under pressure from another investor. Activist hedge fund Palliser, which owns around a 4 per cent stake in the business, called earlier this month for a boardroom shakeup and urged management to “refocus on driving profitability” after the Hedin mess.

While overall gross margin was flat at 11.8 per cent, with a 180-basis points rise in new vehicle margin offset by a 170-basis points contraction in used vehicle margin, these results displayed resilience and strategic progress.

Investment bank Berenberg pointed to the “significant progress” seen in Pendragon’s utilisation of its Pinewood technology division, the 61 per cent year-on-year growth in its omnichannel used car online platform, and the access gained to higher-margin cars through the purchase of the “sellyourcar.com” domain name.   

Strategic progress could also be seen in a new partnership with BYD, the big Chinese new energy vehicle manufacturer. Pendragon is BYD's UK launch partner, with a total of eight locations planned for this year. 

Market supply and demand dynamics drove Pendragon’s increase in revenues. The car market has been impacted by semiconductor shortages, which has meant a reduction in new vehicles and higher prices. The company’s new vehicle volumes were down by 6 per cent and used volumes down by 9 per cent, on a like-for-like basis. Average selling prices were, conversely, up significantly, by 19 per cent to £18,667 for used vehicles and by 15 per cent to £29,529 for new vehicles.

Profits were slightly ahead of what the board had guided for in January’s trading update, despite a £10mn headwind from higher inflation and interest rates. The latter has the potential to hit finance and insurance demand. An 8 per cent increase in operating expenses wasn't a bad result, and this was impacted by the non-repeat of government help in 2021 and a higher marketing spend. 

The shares are valued by City analysts at 6 times forward earnings, according to the consensus position on FactSet. This is notably below the 5-year average of 9 times. Market trends remain in the company's favour – it had a strong order bank at the year-end of over 22,000, and management noted that “used car supply is anticipated to remain tight, following the prior three years of registration shortfalls of new vehicles.” Hold.

Last IC view: Hold, 23p, 21 Sep 2022