Pendragon attracts another suitor as volumes expand

Pendragon’s (PDG) half-year figures point to operational progress in the period under review, but attention will settle on the £447mn unsolicited takeover proposal from US auto trader AutoNation Inc (US:AN) – the latest in a succession of approaches.

With over 300 outlets across the pond, AutoNation is one of the largest car dealerships in the US based on revenue and there is no chance that Pendragon’s progress at the half-year mark would have gone unnoticed. Top-line growth was achieved against a backdrop of rising interest rates and persistent inflationary pressures. The group, which incorporates the Evans Halshaw unit – the UK’s leading volume motor car and commercial vehicle retailer – delivered a 15.5 per cent uplift in like-for-like revenues despite the macroeconomic challenges, while underlying group profits rose by 9.6 per cent to £36.7mn.

Nevertheless, activity in the new car market remains well below pre-pandemic levels, although Pendragon’s volumes are certainly heading in the right direction. Its UK Motor division saw a 13.3 per cent uptick in revenue, together with 23.7 per cent growth in underlying operating profit. New vehicle volume growth ran into double figures, helped along by easing supply constraints.

It’s clear that the used car market has changed dramatically due to lingering pandemic after-effects. Supply remains tight, particularly in relation to “nearly new” vehicle availability; a consequence of slowing fleet registrations when Covid-19 took hold and semiconductor shortages persisted. That trend has since reversed, and UK fleet registrations increased by 37.5 per cent over HY2022.

The overall improvements may help to explain the M&A clamour. The AutoNation cash bid – at 32p a share – came after Pendragon announced that it would sell its UK motor and leasing businesses to US motor group Lithia Motors for £250mn, valuing Pendragon at 27.4p a share. The group subsequently received a revised approach from its largest shareholder, Hedin Group, in partnership with Penske, the owner of UK auto dealer, Sytner, which valued the target at 32p a share.

Are the bids wide of the mark? At 11 times FactSet consensus earnings, the rating has crept up appreciably since HY2022 – unsurprising given the takeover interest. Sales and vehicle availability are expected to improve further through the remainder of this year, yet there is a chance that credit markets will remain tighter for longer, an indirect result of inflationary pressures linked to the oil price. With the prospect of further bidding action going forward, hold tight. Hold.

Last IC View: Hold, 17p, 22 Mar 2023