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Pendragon warns of full-year losses

A combination of internal and external troubles will cause the group to lose money
June 12, 2019

Pendragon’s (PDG) latest update has confirmed what market data has been saying for some time now; the UK car market is a difficult place to operate. However, the group’s troubles are partially self-inflicted.

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Declining car registrations and valuations, combined with a range of operational challenges, mean the motor retailer expects to be “significantly lossmaking” in the first half of the year. While profitability is expected to recover to some extent in the second half, the group expects to make a loss for the full year overall.

Costs increased in the aftersales business and provisions that were released in the prior year will not recur this year, but the fundamental problem is that demand has fallen. 

The group makes 54 per cent of its revenues from the UK motor business, both selling and servicing vehicles, but the market has become increasingly challenging. It sold new cars at reduced margins in the first quarter, as it struggled to meet volume targets.

Management also reported a 23 per cent increase in used car stock towards the end of 2018, which is expected to contribute to losses in the car store business more than doubling to £25m over the year. In spite of this, the group is dedicating significant focus to the used car market and maintains it offers significant potential.

Market data echoes Pendragon's warning. The Society of Motor Manufacturers and Traders (SMMT) reports that used car sales have been falling since early 2017, with the latest update showing more than 2m fewer transactions in the first quarter of 2019. The new car market looks even worse, with registrations down 4.6 per cent in the year to May 2019.

Demand problems risk being compounded by rising costs, too. The SMMT reports that 68.4 per cent of cars registered in 2018 were imported from the EU, and with the outcome of Brexit as unclear as ever, car retailers face potential tariffs of 10 per cent on imports, with a projected cost of £2.7bn.

Pendragon’s profit warning caused the shares to plummet almost a quarter on the morning of the announcement. Investors also sold down many of its listed peers. Lookers (LOOK) saw its shares fall 6 per cent. Motorpoint’s (MOTR) shares were down 1 per cent, despite reporting trading in line with expectations just the day before. Vertu Motors (VTU) and Inchcape (INCH) also saw their shares fall.