Small Cap Value Report (Mon 23 Oct 2017) - PDG, TRAK

23rd Oct '17 by Graham Neary

35 comments 13681 reads

Good morning!

I am currently in an airport as I set out to spend the day with the Stocko team in Oxford.

Paul might be along with updates in a short while, but either way I thought I would open up the thread for reader comments.

Best wishes,

Graham

Morning everyone, it's Paul here!

I'll also be heading for Stockopedia HQ in Oxford shortly. There's just enough time to squeeze in a few brief comments on some of today's RNSs.

Pendragon (LON:PDG)

There's a profit warning today from the UK's largest car dealers. This is rather surprising, since brokers were upgrading forecasts as recently as August, on the back on strong H1 results. So this suggests a fairly nasty slowdown in H2.

It says that underlying profits for 2017 will now be about £60m. It did £48m adjusted profit in H1, so that suggests only £12m profit in H2. The latest forecast I have from one broker suggests £71.1m adjusted PBT in 2017. So today's company forecast of £60m is a 15.6m shortfall - all of which has occurred in H2 remember - so annualised, it suggests a steeper fall in profits.

Reasons given for the profit shortfall are - declining new car sales, and a fall in used car prices. I suppose this was bound to happen, due to the boom in car sales in recent years. Furthermore, weaker sterling has increased prices, and there's no doubt that consumer confidence has weakened this year. So perhaps people are less inclined to make big ticket purchases? Although given that most private cars are now not bought, but are leased, then I question whether car purchases really are big ticket items any more? After all, if you can lease a brand new Audi A4 for £179 per month, and a car is essential for you, then would you really worry about signing on the dotted line? Also, a new car means little servicing or repair costs, so there's a strong argument for driving a brand new car, as opposed to a more thirsty & unreliable cheap older car.

Strategic review - whenever those words are mentioned by a company, I wince. It usually means there are some kind of structural problems. That in turn usually means exceptional costs, and a period of time for the business to be re-shaped,…

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Ramridge

23rd Oct '17

Re. £G4M they have just reported 0p eps for H1. So to meet broker forecast they have to do at least 10.6p in H2. Yes, the business is 2nd half weighted, but still that seems to me to be a tall order. US expansion will require more capital and marketing expenditure.

RayDC

Hi Paul/Graham: BMS has reported interim figures today - is there any chance you could look and provide thoughts on this company.please? The figures to me show a gradual improvement but the market has taken a dislike so your thoughts would be appreciated.

I used to have PDG on my watch list but switched to VTU which has gone against the market trend even with its continual very low operating margin so perhaps it is not all doom and gloom in the car dealer market - yet!

herbie47

I thought there maybe an increase in demand from those with old diesels that are scrapping them for new cars due the generous scrappage schemes from many manufacturers. I'm considering scrapping my old diesel car and buying a petrol one.Then maybe in 10 years time if I'm about there maybe a scrappage scheme for petrol to buy electric.

andrea34

...and what are G4M doing announcing their interims at 1.04pm!?!? :-O

kenobi

hang on herbie, you think there might be an increase in demand for newer diesels for people upgrading from older diesels ? perhaps . but I suspect many like yourself will prefer to switch to petrol.

I agree there may well be a scrap-age for petrols in the future !

K

Have a look at the heading in their RNS :
"
Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, has become aware that external parties have had sight of certain information from its unaudited financial results for the six months ended 31 August 2017, following a distribution error by a third-party research provider.
As a result, the Group is announcing the results for the six months ended 31 August 2017 below, ahead of the scheduled date of 24 October 2017.
"

hawkipa

Hi Seadoc, Thanks for your thoughts and well done on a stellar trade! Its always interesting to see other thought processes on the same topic.

I was just looking at Pendragon (LON:PDG) last annual results and thought it worth mentioning that they do own £199m of property and land so whilst not questioning your logic, they do have some pretty decent tangible assets in the form of property.

Having just bought a new car (Audi) I've used the process as a little bit of investigation into the whole car dealership business. Naturally if possible I intended to purchase through a Pendragon (LON:PDG), but that wasn't possible as they didn't have the model of car I wanted. I did purchase through Marshall Motor Holdings (LON:MMH) as they offered the Audi I wanted. The first thing I noted is there is zero brand (motor dealer) loyalty. I doubt they care about this because they all use a number of different brands and often the dealership is Audi Beckenham, Land Rover Battersea, Audi Oxford etc. This demonstrated to me that scale is crucial. The second point on scale was that the car I traded in was a VW and is now for sale within their group at a VW dealership for £3k more than the trade in I got. Assuming they spent £500 doing it up (yes the wheels were very scuffed!) and they take an offer on it they may still clear £1-2k on it. That means they got a scale advantage of two bid/offers purely by the size of the dealership network. Smaller dealers would just send the car off to auction I believe and pass this bid/offer on in order to gain the initial car sale. This is the same of for all of the listed players I would assume.
The point you raise about electric cars is fascinating and I can't disagree. What is questionable though is the roll out time for electric cars to truly usurp the ICE. Again, going back to my experience. I wanted to buy an electric or at least a hybrid. However, as I park my car on the street I couldn't and when I spoke to Volvo, LandRover and Audi they all agreed that the issue of charging was not being solved in the near future for those wanting to buy hybrids. So I abandoned the hybrid purchase solely for this reason. Though one other reason was the Audi hybrid had no real boot space because of the battery packs. As a father of 3, this was never going to fly with my wife shuttling kids and kit around daily. More interestingly, the head of a supplier of motor industry parts spoke recently about the issue of logistics of electric cars as did National Grid. Essentially, whilst the technology to make workable electric/hybrid cars is there the infrastructure is not. Apparently, there is a need for wholesale upgrading of sub-stations to avoid surges that could literally melt the network if everyone plugged their car in when they got home. Secondly, the issue of charging on the go is not yet solved to allow for wholesale adoption. The oil companies are unlikely to fill petrol station forecourts with charging points until they can benefit. So for that reason, I don't think electric cars take off in the coming years. In ten years, I have no doubt that they will be the dominant form of vehicle, but for now the car dealerships are going to continue selling and servicing cars.
On servicing I have always taken my car to a main dealer to service it and I think I might be representative, as this preserves its secondary value. On PPI, you have to service it at a main dealer so if you agree that electric is somewhere between 3 & 10 years to gain critical mass then the motor dealers are going to continue in their present form for some time to come.
My original thought was that motor dealers were being viewed like Personal Computers were about five years ago ie were all going to be using ipads/phones, but fast forward and we now see PC usage actually increasing again. A spurious analogy I know but does give a good example of a change in fortune.
So for me, the issues right now come down to those of car pricing and consumer confidence vs valuation. I'm no further on than this morning on that issue!

£G4M has been forced to issue their results early due to a leak.

No not for diesels but for new cars. If they clear most of the older diesels off the roads then many will be buying new cars (petrol), it makes sense.

I'm switching to petrol for several reasons, I don't drive so many miles now, the road tax which was £35 has now gone up and the future for diesel is unclear.

sorry Herbie,
I think I misunderstood, yes I agree, I think the future of diesels is a bit uncertain, whereas 10 years ago, it seemed like the way to go.

It's certainly the case if they can't get emissions down in real world use. The previous link highlighted how even todays diesels are very dirty in real life tests.

K

LeoInvestorUK

Trident,

As has been touched on, London have just started penalising some older models proven to be less polluting than brand new models that are still allowed.

So if your concern is about killing people and global warming then a carefully researched diesel with independent test results may be the best choice. However it is almost certain the regulators will continue to use the euro test standards and since these are so utterly flawed and discredited that means the likely blanket banning / penalising of all current diesels. You can limit your risk by leasing or buying with a guaranteed buy-back option, but I would say there is a risk of regulatory action within the typical 3 year term.

Housemartin2

In my case, her indoors (is there any situation where this phrase is acceptable now ?) tells me that I am not to buy another diesel after having 4 diesels in succession. She has read the Press and tells me it is ecologically unacceptable. My 13 plate VW diesel will go in the spring to be replaced probably by a petro Audi. So group pressure is another reason for voting out diesels.

More generally, I think that the tax imperative could stall the widespread uptake of electric/hybrid. My understanding is that there are a lot of tax incentives being used to support the consumer price on electric/hybrid in the UK. ICE vehicles have the opposite tax profile - being increased by pollution charges at the local level. I could imagine that the practical problems mentioned above re electric vehicles could restrict uptake sufficiently to push out the time of mass purchase and the consequent fall in mfg cost, so that the government has to rethink subsidies to which it sees no end.

I understand that the Danish government has recently pulled back on subsidies for electric cars resulting in an unsurprising increase in ICE cars as a proportion of total new vehicle sales.

I am no expert on anything in this post.

matylda

£G4M - Am I being crazy here - But I see EPS forecast to grow 20% (over 2 years) from 2017 from 2019 and it's on a PER of 66 ! Sure, I understand there may be upgrades but today's in-line statement means what - We pay a PER of 66 here for 20% over 2 years. OK let's be generous - and say they really exceed expectations - 40% growth in 2 years. Is it fairly priced here or a short?

I know I am not the most intelligent of investors but would love some input on this?

barnetpeter

The sunday press suggested yesterday that profit warnings are now at a 6 year high. Yet the mkt keeps going up. On borrowed time I reckon. Expect more Pendragon type warnings.

AnonymousUser252054

Call me old fashioned but why should third parties be given access to unaudited results in the first place?

I was wondering whether the Pendragon (LON:PDG) statement might contain evidence of them being tempted to commit to new cars in a declining market in order to avoid an impact on cash balances / debt from VAT, exactly like Vertu Motors (LON:VTU) didn't. There is some evidence of this (declining margins, lower reductions in revenue, higher cashflow conversion) but revenue still fell significantly and the differing periods make it hard to compare. I get the impression it is others falling / forced into this trap more, thus the statement:
"In the premium sector we have experienced unprecedented pressure on new vehicle margin caused by certain manufacturers continuing to force vehicles into the market despite softening demand. "

PDG 4m to 20th Oct LFLs:
"Revenue grew by 3.7% ... with used revenue growth of 18.1%." [Implies New fall of 11% vs Q3 UK Market of 9%]
"New gross profit reduced by 20.7%"
"Used gross profit (including the negative impact of pre-registration and demonstrator sales) reduced ... 20.3%"
"Our net debt has reduced by £34.5m in the period"

VTU 6m to 31st Aug LFLs:
"new car retail volumes down 14.7%"
"Increased new car margins"
"Period-end net cash of £20.8m (2016 H1: £12.9m)" [Note: VTU are approx half the size]

bestace

Having had a quick look at the US website it feels like they're not really ready to start selling there as they'll still be fulfilling all US orders from Europe for the time being.

Looking at the details for a bass guitar (product picked at random by clicking a few links), they are charging $60.50 for DHL delivery from the UK when you can get the same item delivered in the UK for as little as £5.49.

And on top of that there's this, displayed on the 'checkout' page:

Additional Local Import Duties and VAT may be payable on delivery
This order will be shipped to you from the UK... You may also have to pay VAT, additional local import duties and administration charges for this order, subject to the duty thresholds in your country. You will be contacted by the local courier to make payment either prior to or on delivery of your goods if it is required.

Amazon.com is charging $20 less for the same guitar with free delivery to the US and no import duties.

So anyone buying from the US would basically be paying well over the odds for the product and for delivery, with an open ended liability for import duties on top.

Surely this is a non-starter until they can get a US-based fulfilment operation up and running?

Contrast this with Boohoo.Com (LON:BOO) who also fulfil all their US orders from the UK, but they pick up all the duties and import duties so no cost premium to the customer.

Hi bestace Frankly I am very skeptical of a business model that fulfils US customer orders from a distribution centre based in the UK. Especially where the returns can be as high as 30% - 40%, as is the case with BOO. It must put them at a cost disadvantage compared to a similar locally based enterprise.

G4M do not suffer such high returns, but they are already operating on thin margins. It would not require a high rate of returns to make this model unviable.

hayashi22

Re G4M: it explains why these research houses are able to turn out notes an hour after results because they have had the results sent to them before!-obviously something went wrong today. Very embarrassing for Edison.

Trident

24th Oct '17

Governmental & the Regulatory world is increasing Company liability at various tax, general liability and regulatory levels.

For example the on top of the all the other tax takes I have touched on before, Apprentice Tax, Company NI, minimum wage levels, pension auto enrolment (to name but a few) we also the imposition in 2018 of EU GDPR regs, which threatens in principle to deliver unlimited fines on Companies which have data breaches. For SME companies I suspect most won't even know at this stage what the scope of their obligations are but given its UK 2018 implementation date (whether or not we actually leave the EU it will apply to the UK) it will have some cost implications for businesses to adhere to it either in external consultancy costs, or some internal diversion of resource to attend to it, or both.

You can't help feeling that whilst many of these initiatives have a political feel good message, they are an economic drag on the SME market which provides substantial tax revenues to the Govt. Individually not deadly, but collectively deadening. I know some will say corporation tax rates has been reduced, but if your above the line costs are all being increased CT becomes rather academic.

It just feels like another straw on a heavily burdened donkey.

Small Cap Value Report (Mon 23 Oct 2017) - PDG, TRAK

Pendragon (LON:PDG)

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Graham Neary

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