My view on Pendragon

Shares in the car dealership Pendragon (LSE: PDG), which owns the Evans Halshaw brand, fell today as it revealed it expects full-year profit to be around the lower end of current market expectations. That’s despite an improvement in the second half.

The company had already warned in September that the group underlying loss before tax for FY19 was set to be at the bottom of the board’s expectations after a “challenging” first half.

The latest update follows a particularly difficult 12 months for the company which lost a CEO, Mark Herbert after less than three months in charge and a huge interim loss.

The sector has also been hit by a slowdown in new car sales and a crackdown on personal contract purchase (PCP) loans.

Broker Liberum said it now expects losses to be around its forecast of £18.6m as it was already at the bottom of consensus numbers.

“Pendragon remains our least preferred stock in the sector, given its high operational and financial gearing and the need for material business change in a tough trading environment,” said the broker.

My view

The shares price has fallen over 55% in just the last year. It leaves the market capitalisation at just over £150m.

The falling share price has pushed up the yield to over 10% and pushed down the P/E to an unbelievably low level – around four. Often the combination of a cheap share price and high dividend yield would be tempting to an investor like me, but on this occasion I’m less likely to buy in.

One of the nearest competitors by market capitalisation is Vertu Motors (LSE: VTU). It’s shares also appear cheap and high-yielding at seven and 4% respectively.

Back in October 2019, it posted a decline in interim profit on Wednesday but said it was on track to meet its overall expectations for the year.

In the six months to the end of August, pre-tax profit fell to £16.1m from £17.3m in the first half of last year, while revenue grew 5.6% to £1.6bn.

Another competitor which has a market cap of nearer £250m is Lookers (LSE: LOOK). Strangely it also has a P/E of four and a yield approaching 7%. It had a profit warning at the end of last year which saw its share price skid.

But overall since about mid 2019 its share price has slowly been recovering since a more than 50% fall in the first half of 2019.

Coming back to Pendragon it’s not hard to see why investors are concerned. In its full year results from 2019, the operating margin fell between 2017 and 2018 by 0.2%, putting it at a very slim 1.6%. Operating profits crashed at its two biggest divisions – UK Motor and US Motor – both by over 20%.

Overall the balance sheet seems to be worsening, with debt increasing and cash flow decreasing – which to me is not a great combination.

Although the smaller listed car retailers are looking very cheap, I think there could be further downside for the share prices. The market remains challenging for these companies. Pendragon shares have been particularly hard hit and could easily fall further.

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