Car dealer Pendragon (PDG) is in reverse gear on Wednesday, the shares off 6.4% to 23.6p on news of a worse than expected first quarter loss as margin pressures put a dent in profitability.

New management at the Nottingham-headquartered new- and used-car seller is carrying out a review of the spluttering business, while rivals Lookers (LOOK) and Vertu Motors (VTU:AIM) are both trading lower on the negative industry read-across.

READ MORE ABOUT PENDRAGON HERE

Pendragon claims to be the UK’s leading automotive online retailer, represents a range of volume and premium car brands and is best known for its Evans Halshaw and Stratstone businesses. As such, the group’s earnings are geared into the fortunes of a spluttering UK new car market.

In today’s poorly received update covering the first quarter to 31 March, Pendragon reports 6.3% growth in like-for-like new car sales. That is ahead of a 2.4% decline in registrations in the overall new car market, which has been impacted by uncertainty over diesel and Brexit. Pendragon’s used car and aftersales revenues were also in growth in Q1.

Unfortunately, ‘challenging trading conditions’ resulted in a reduction in new, used and aftersales margins alike. Combined with higher operating costs and increased losses within Car Store, its online marketplace, this margin pressure meant Pendragon struck a £2.8m underlying loss before tax for the quarter, ‘around £10m lower than our expectations for the period’.

This follows on from March’s full year results, which revealed a £12.6m plunge in underlying pre-tax profit to £47.8m, no surprise given the tough dynamics which plagued the UK motor industry during 2018.

Last month, Pendragon also reported ‘subdued’ new car sales and warned that the UK’s impending exit from the EU would drive uncertainty in consumer confidence and manufacturer behaviour for new car supply. The UK motor retail sector is acutely sensitive to Brexit, because the majority of cars are imported from Europe and there is a clear correlation between the strength of sterling and new car registrations.

The introduction of Worldwide Harmonised Light Vehicle Test Procedure (WLTP) has also created disruption in new car sales and uncertainty over new vehicle supply. WLTP is a new emissions, CO2 and fuel economy test that all cars sold in the EU have to undergo and came into effect on 1 September 2018.

STRATEGIC REVIEW BEGINS

Given today’s disappointing trading update and the recent appointments of a new CEO in Mark Herbert, successor to the long-serving Trevor Finn, and a new finance director in Mark Willis, Pendragon is carrying out what sounds like a radical review ‘of the operational and financial prospects of the group’.

Pendragon says the results of this review will be communicated to the market in June.

THE EXPERT’S VIEW

Russ Mould, investment director at AJ Bell, comments:

‘You know a profit warning is bad when a company launches a “review” in its wake. Margin pressure has resulted in a first quarter loss for used and new car dealer Pendragon. Its earnings were considerably below expectations. Investors will be hoping the review doesn’t turn up any nasties when the UK’s biggest dealer publishes the results in June.

‘What today’s news indicates is a continuing reluctance on the part of UK consumers to splash out on big ticket items amid economic and political uncertainty unless prices are cut.

‘Pendragon apparently made the judgement that it would rather maintain market share even if this impacts profitability. Performance was also hit by teething problems in its Car Store franchise.

‘Investors can take a little comfort from the growth in lucrative after-sales work but otherwise this is pretty miserable news which is likely to firmly put the brakes on a year-to-date rally in the shares.'


Issue Date: 17 Apr 2019