Pendragon – A Once And Future Win?

A very strong Q1 performance has been recorded by a leader in the UK motor sales market. It now expects to beat expectations for the year.

The Nottingham-based Pendragon (LON:PDG), which is deeply involved in the automotive retail sector in the UK, is sounding very positive.

The recently announced first quarter results from the group recorded a massive 32.3% increase in operating profits to £37.3m, despite the £4.6m impact of 51.7% higher interest costs.

The company delivered impressive advances across all divisions, resulting in underlying profit before tax of £23.0m, which was an increase of £4.3m compared to the prior year.

The Business

The company operates through three segments: UK Motor, Software, and Leasing.

Employing some 5,000 people, the group operates over 160 sites across the UK under the brands of Evans Halshaw, Stratstone, CarStore, Pinewood, Quickco and Pendragon Vehicle Management. 

Evans Halshaw is the UK’s leading volume motor car and commercial vehicle retailer, providing national coverage with over 100 retail locations in England, Scotland and Wales.

Evans Halshaw holds franchises to retail and service 11 brands for cars, vans and HGVs, including Citroen, Dacia, DS, Ford, Hyundai, Kia, Nissan, Peugeot, Renault and Vauxhall.

Stratstone is one of the UK’s largest premium motor car retailers, with 46 franchise points nationwide representing some of the world’s most prestigious manufacturers.

Stratstone holds franchises to retail and service 10 brands, including Aston Martin, BMW, BYD Auto, Ferrari, Jaguar, Land Rover, Mercedes-Benz, MINI, Porsche, and smart.

Its UK Motor segment includes sale and servicing of vehicles in the UK; the Software segment includes Licencing of Software as a Service to global automotive business users; and the Leasing segment includes provision of fleet and contract hire.

In the full 2022 trading year, on a sales per business basis, it turned over £3.54bn on its UK Motor side, representing 97.7% of total sales, its Leasing division had £64.7m sales (1.8%), while its Software company saw £19.10m in revenues (0.5%).

The company, which was set up in 1988, sells new and used motor cars, motorbikes, trucks, and vans, as well as offers associated aftersales activities of service, body repair, and parts sales.

It also operates carstore.com, an online marketplace for used cars; and distributes aftermarket parts, accessories, and workshop consumables under the Quickco brand.

In addition, the company provides cloud-based dealer management systems; and Licence Link, an online license checking tool for fleets, as well as hires and leases cars and vans to small, medium, and large fleets under the Pendragon Vehicle Management brand, while it retails vehicles under the Evans Halshaw and Stratstone brand names.

Some of the investment attractions of the Pendragon Group are:

1. A market leader: it is the second largest automotive retailer in the UK. The company’s size and scale provide a competitive advantage and enables it to negotiate better terms with suppliers and manufacturers.
2. Diversified revenue streams: it operates in multiple segments of the automotive industry, including new and used car sales, aftersales services, and fleet management. This diversified business model helps to mitigate risk and provides multiple revenue streams.
3. Strong brand recognition: the group has a strong brand with a long history in the UK automotive industry. This brand recognition helps to attract customers and build trust with consumers.
4. Focus on customer experience: the business places a strong emphasis on providing an excellent customer experience, which helps to build customer loyalty and drive repeat business.
5. Growing demand for electric vehicles: as the UK government pushes for a transition to electric vehicles, the demand for EVs is expected to increase significantly in the coming years. The company has positioned itself well to benefit from this trend by expanding its offering of electric and hybrid vehicles.

Overall, Pendragon Group offers investors exposure to a leading player in the UK automotive industry, a diversified business model, strong brand recognition, a focus on customer experience, and exposure to the growing demand for electric vehicles.

Management Outlook

The strong start to the year was ahead of expectations.

There are encouraging signs of improvement in production and supply of new vehicles, although used vehicle supply is expected to remain tight for the foreseeable future. 

Remaining mindful of the macro-economic headwinds, including the potential for further interest rate rises and continued inflationary cost pressures, the group now expects to comfortably outperform the previous expectations for FY23.

Chief Executive Bill Berman stated that:

“I am delighted to report a very strong performance in the first quarter, which builds on the momentum we generated last year from the progress with our strategic and operational initiatives.  

We continued to trade strongly in UK Motor, across both new and used markets, and our performance shows the benefits of the strategy we have been pursuing in recent years.

It is really encouraging to see all of the Group’s divisions in growth, particularly when considering the ongoing challenges in the external operating environment.

We are seeing improving signs in the production and supply of new cars and we are focused on continuing to deliver for our customers and OEM partners in the months ahead.”

The Equity

There are 1,396,944,405 shares in issue.

The Hedin Group AB, controlled by Anders Hedin, holds 26.3% of the group’s equity.

Other large holders include Schroder Investment Management (11.8%), Briarwood Chase Management (10.0%), Odey Asset Management (9.84%), Hosking Partners (4.79%), Merrill Lynch International (Investment Management) (3.40%), Dimensional Fund Advisors (2.71%), Farringdon Netherlands BV (2.24%) and BlackRock Investment Management (2.02%).

Analyst Opinion – 26.8p SOTP

Mike Allen and Carl Smith, analysts at Zeus Capital, estimate revenues to end 2023 of £3.92bn with adjusted pre-tax profits of £55.0m and earnings of 2.9p per share.

They have a ‘sum of the parts’ value on the group at 26.8p per share.

For the 2024 trading year the consensus view is that pre-tax profits will rise to £59.2m, worth 3.1p per share in earnings.

Conclusion – significantly undervalued

Just last November this group’s shares were trading at 28.5p in the market, last night they closed at just 18.2p, valuing the group at £256m.

An early rise on the back of continuing such good corporate news could see them heading back up to at least 22.5p, a useful advance before climbing even higher over the next year or so.

I now set a Target Price of 22.5p for the shares.