Shares in embattled Pendragon (PDG) reversed 2.8% to 11.24p after the clapped-out car dealer warned its loss before tax for the year to December 2019 would be ‘around the bottom end’ of market expectations.
Demand weakened further in the run up to December’s general election, denting the franchised UK motor division, although management insisted Pendragon is on a ‘much stronger footing’ entering 2020.
RUNNING ON EMPTY
In today’s brief update, Pendragon, which is best known for its Evans Halshaw and Stratstone businesses, pointed to a significantly improved performance during the second half of the 2019 calendar year.
This was despite tough car market conditions and frail consumer demand in the run up to polling day.
While the Car Store, Leasing, Pinewood and US motor divisions all performed in line with expectations, the domestic franchised motor arm (Pendragon’s biggest unit by revenue) struggled in the final quarter.
Liberum Capital’s £18.6m loss before tax forecast for 2019 was already at the bottom end of the range, the top end of consensus calling for a £12m deficit, so the broker made no change to its estimate today.
Nevertheless, Liberum maintained its ‘sell’ rating and shrivelled 9p target price for the equity, stating: ‘Pendragon remains our least preferred motor retailer, given the high operational and financial gearing and the need for material business change in a difficult trading environment’.
PERFORMANCE ‘RE-SET’
Pendragon, which has seen two chief executives depart in the past year and axed the half year dividend in September, is among the cohort of quoted UK motor retailers having to contend with subdued new car sales, margin pressures, stricter emissions regulations and the shift towards sales of electric or hybrid cars.
While the latest downgrade is disappointing, Pendragon’s board remains confident that the second half performance pick-up puts the business on ‘a much stronger footing as we enter 2020’.
The latter half of last year benefited from actions taken to ‘re-set’ performance, insisted the board, citing the closure of 22 struggling Car Store sites, better management of used vehicle inventory and a sharp focus on controlling operational costs.
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Liberum explained that after a £32.2m loss before tax in the first half, the updated guidance implies Pendragon ground out a £13.6m profit in the second half, although this still represents a steep 30% year-on-year profits decline.
For financial years 2020 and 2021, for now at least, the broker forecasts a recovery in pre-tax profits to £14m and £27.1m respectively.
