Small Cap Value Report (Tue 13 Feb 2018) - Car Dealerships Special

Monday, Feb 12 2018 by

Hi, it's Paul here.

At the suggestion of Matylda, I'll be doing a car dealerships special today. This is because Pendragon (LON:PDG) has reported its 2017 results, but there's nothing much else of interest on the RNS today. So I'll write about PDG, and compare it with 6 other listed car dealerships, being;

Vertu Motors (LON:VTU)
Cambria Automobiles (LON:CAMB)
Lookers (LON:LOOK)
Inchcape (LON:INCH)
Marshall Motor Holdings (LON:MMH)
Motorpoint (LON:MOTR)

I started quite late today, so this article will gradually take shape throughout this afternoon.

Pendragon (LON:PDG)

Share price: 24p (up 14.6% today)
No. shares: 1,424.1m
Market cap: £341.8m

(at the time of writing, I hold a long position in this share)

Full year results - for the 12 months to 31 Dec 2017

We are the UK's leading vehicle online retailer with 184 franchise points and 27 used retail points.

We represent a range of volume and premium products that we sell and service which include:  Aston Martin, BMW, Citroen, Dacia, DAF, Ferrari, Ford, Harley-Davidson, Hyundai, Jaguar, Land Rover, Kia, Mercedes-Benz, MINI, Nissan, Peugeot, Porsche, Renault, SEAT, Smart and Vauxhall.  

Brand names include: Stratstone, Evans Halshaw and Quicks.

Note the emphasis on online sales. This is rather interesting, as Pendragon is not a vanilla car dealership chain. It also has a software business, which is material to group profitability - see table below;


The first column is calendar 2017. The second column is the 2016 comparative. As you can see, group operating profit fell from £101.2m to £83.8m. This was expected, since UK new car sales fell sharply in 2017. The suggested reasons for this include: Brexit-related uncertainty, higher prices due to sterling devaluation, lack of consumer confidence, and uncertainty over diesel vehicles caused by a shift in Government policy.

Other issues which might be hurting sentiment towards the sector include the likelihood of electric cars growing in popularity - and requiring less attention in garages. Also, ultimately…

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Pendragon PLC is an automotive online retailer. The Company's principal market activities are the retailing of used and new vehicles and the service and repair of vehicles (aftersales). Its segments are Stratstone, which consists of its vehicles, truck and commercial vans brand, including the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities; Evans Halshaw, which consists of its volume brand, including the sale of new and used motor vehicles and commercial vans; US Motor Group, which consists of its retail operations in California in the United States, including the sale of new and used motor cars; Pinewood, which consists of its activities as a dealer management systems provider; Leasing, which consists of its contract hire and leasing activities; Quickco, which consists of its wholesale parts distribution businesses, and Central, which represents its head office function and includes all central activities. more »

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60 Comments on this Article show/hide all

tic_tac_toe 13th Feb '18 41 of 60

In reply to post #314943

you'll find more info here

and current deal is 1/2 price ticket offer via twitter

(sorry for off topic)

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FREng 13th Feb '18 42 of 60

Re strategic motor industry issues. IMO there is a threat to dealers and insurers from increasingly automated cars. Firstly they are likely to be electric, so few separately moving parts, less mainenanance needed. It seems most manufacturers depend on dealer mainenance and spare part sales. So I think the move to leasing must accelerate and incorporate insurance. Bad for dealers and insurers. Secondly, when only half the cars are AVs all other road users will bully them. Probably causing a bad experience for AV occupants and a lot of accidents.

Apologies for typos. IPhone !

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mojomogoz 13th Feb '18 43 of 60

FWIW since we are talking motor retail...

I like and own Vertu Motors (LON:VTU)

I believe that investing in this sector is all about return on capital and return of capital to investors. From looking at them I think that Vertu are the most disciplined in this that ain't obvious from a shallow look and its a contentious view too that I know has a lot of proving to do.

Vertu's ability to manage their capital well is hidden by the rapid acquisitive growth they have gone through and the tendency to significant equity issuance to drive that growth. Going forward they have indicated no more equity issuance for acquisition.

Reasons to buy this stock

1) They are buying back stock. They have stated up to 20% of outstanding issuance by summer AGM. Current rate looks to be maybe as high as 150,000 per day average (there's some much lower purchases at points so need to see how it evens out) - 100 days of that sees c.4.5% of market cap bought back. If 20% is what they reach then they need to step up the rate.

2) Returns are sort of suppressed by the extent of acquisition and capital investment made.

3) Significant showroom capital investment phase is rolling off, likely freeing up cash for buyback

4) 40% of profit from servicing with potential pick up in this contribution from maturing acquisitions

5) They are particularly negatively effected by current sales dip due to their exposure to non premium motors and away from the SE England...they seem to be holding the line decently against a rapid dip which shows the underlying management discipline IMO...particular when you factor in the level of acquisitions and how that could have softened them up for a hit in this downturn. NB Pendragon are premium motors by comparison. So much more benign backdrop for them of late.

6) Management are significant owners of stock.

Will the UK market bounce? Dunno. My guessestimate is yes as the diesel thing works through and the UK consumer also decides that its not the end of the world. Outcome paths from Brexit probably pretty irrelevant...more important is that clarity comes.

I see Vertu giving returns through their own work lifting margins and capital management. This is going to give earnings growth a healthy rate once the current rapid cool slows down. Then there is the chance for upside surprise from a top line and cyclical perspective.

EVs and driverless cars are not a worry. Maybe its the future but I am skeptical it is so simple for a variety of reasons...on EV one of the simple reasons is we do not have the electricity generation capacity to do it and if it were to happen rapidly the combination of a decent battery and price of electricity will move against the EV buyers in a surprising way. Battery tech is not as hot as people think ...remember they are highly unstable, effectively contained bombs. Plus the resources to make and the fabrication process are very energy intensive. Currently developers are trying to move to higher proportion of cheaper inputs such as Nickel...however, that makes the battery more unstable. And if you really believe in EV...well then maybe you should just jump into uranium :)

EV might happen big style....but there's a lot in the way short term and its too much future to look through for a cyclical business like this.

The biggest threat is a viscous cycle of fall in 2nd hand prices that pushes up the length to which people keep their financed new cars as they can't trade in so early. 

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dahokolomoki 13th Feb '18 44 of 60

In reply to post #314618

Didn't Ebiquity (LON:EBQ) also make an acquisition last year? I think it was mentioned when I read through the trading update today. Could explain the cash position discrepancy.

For what its worth I think they're focused on some hot growth areas in online marketing - performance marketing, as well as media audit / media value. However, it is a competitive space, especially for small/medium agencies. And many companies are deciding to take digital marketing capabilities in-house rather than outsource to an external agency.

I reckon the best route for maximum shareholder returns would be an acquisition, by one of the big global agency groups. But many of them (e.g. WPP) are struggling themselves at the moment so not sure if there's appetite for M&A in the sector.

Meanwhile if management at EBQ can be more proactive in communicating trading updates more frequently, and actually demonstrate some good client wins and growth, this could easily re-rate and see broker forecasts increase, which would deliver some good outsized returns.

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Zipmanpeter 13th Feb '18 45 of 60

Re Car dealers - agree much of the the analysis about tough for car dealer sector moving forward especially in near future (electric = less repairs, 2nd hand car price fall quite likely/govt regulation delaying PCP finance recyclng etc, manufacturers selling direct and/or through fewer dealers). However, worst affected IMHO will be small dealers. Sector consolidation already underway. I think will accelerate rapidly - especially if interest rates go up.

Disclosure" I own Vertu Motors (LON:VTU) as I think are well set up to be part of this consolidation and
i) are getting out front with the consumer (2nd hand car brands, MOT servicing plans for aftersales)
ii) they have a clear plan to cut back end costs as they consolidate
iii) have proven OK so far at selling off surplus dealerships well - I think on average car dealer brownfield sites will be attractive to property dealers. Vertu Motors (LON:VTU)
iv) Mgt are experienced and conservative eg evidenced dropping car stocks ahead of decline
v) CAPEX needs will drop off going forward freeing cash for buying in a depressed market/debt reduction/divis

In other words they will be among SECTOR winners in long run (3-5 yrs) even if sector overall struggles. But waiting with interest on Paul's in cross sector evaluation.....

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Aislabie 13th Feb '18 46 of 60

In reply to post #314988

Thank you for your thoughts on Ebiquity (LON:EBQ), you may be right on the acquisition idea, the Australian company Digital Balance was acquired since the year end. However no RNS was issued and the announcement in Australia neither mentioned amount or how it was to be acquired (cash or shares) so I would be inclined to believe that it would have been too small to account for the cash difference.
It is a shame that we have to guess, I can only assume that making an RNS unhelpful does in fact pay off, which is a sad conclusion.
However I do hold Ebiquity and for the reasons you mention I believe it can surprise upwards.

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mojomogoz 13th Feb '18 47 of 60

In reply to post #314988

Options packages looks very 'healthy' for senior management. Is it sector typical?

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ridavies 13th Feb '18 48 of 60

Thanks to all for the comments on Scientific Digital Imaging (LON:SDI) which contribute towards making sense of the volume trades and SP fluctuations. On one in particular though, a 5p drop in SP at one time was a little more than 1.7% and has happened before, though less dramatically than today.
As always,this is a highly constructive and considered source of useful information.

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daveinthelakes 13th Feb '18 49 of 60

In reply to post #314958

I have a play in the car industry so to speak but not in UK car dealers-

BYD Co the worlds biggest electric car manufacturer, also largest electric bus producer, major lithium battery builder and number one in developing electric monorails.
Albermarle (ALB) one of the two largest world lithium miners.
Bacanora Minerals (LON:BCN) a junior prospective lithium miner who should become one of the lowest cost producers. Just hope not too diluted by any further fund raising
Global X Funds (LIT) battery tech and lithium ETF (which may no longer be available on UK platforms)

In a recent report UBS estimates lithium demand will triple by 2025. Other major sources are expected to come on stream from 2023 onwards but I still see lithium prices going up for the next 2-3 years.

I think BYD is the best long term prospect for a wide range of electric vehicles.

I have around 4% of my portfolio in this sector as I believe it is the future albeit I agree we will not know how quickly it is going to develop for maybe five years or so.

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JohnEustace 13th Feb '18 50 of 60

The London Assembly Transport Committee released a report today saying that self driving vehicles won’t be on the roads in London until the 2030’s at least and could add to congestion.

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nicobos 13th Feb '18 51 of 60

In reply to post #314563

Audioboom (LON:BOOM) is certainly an intriging situation - good for shareholders to be a smaller part of a much bigger (and much more profitable!) pie but will they be diluted out of existence ! ?

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ACounsell 13th Feb '18 52 of 60

In reply to post #315063

Would add £UMI to your list. They already have a significant operation in China and are ramping up lithium battery cathode production in what will be largest global market for EVs. In last year £UMI share price exhibited strong momentum even during recent ‘correction’. Also major battery recycling activity which will become more relevant if environmentalists target EV batteries as next hot topic after plastics!

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daveinthelakes 13th Feb '18 53 of 60

In reply to post #315083

Thanks. Looks like a good company but maybe a little expensive at present? I don't subscribe to Stocko Europe but will add it to my watch list.

A good site for info on all things EV is

By the way BYD's monorail is not pie in the sky and they have just opened a driverless one-

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fwyburd 14th Feb '18 54 of 60

In reply to post #315063

HI FrEng
There was an interesting presentation last month at the Growth and Innovation forum on this topic. (My notes are here

One of the questions discussed was which metal/mineral(?) would benefit most from Electric vehicles - Lithium, Nickel, Copper or Cobalt? One point was that there is plentiful supply of Lithium ( Bacanora Minerals (LON:BCN) ) but that Nickel, which is in short supply, would have increased demand as it performs better; likewise Copper was also seen as benefitting. So Glencore (LON:GLEN) Kaz Minerals (LON:KAZ) BHP Billiton (LON:BLT) were suggested as possible winners in this scenario.

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gus 1065 14th Feb '18 55 of 60

In reply to post #314768

For those going into cold turkey due to lack of comments on IQE (LON:IQE) yesterday, interesting to note that the notified short interest has fallen from a recent peak of over 12% to 9.17% as of yesterday evening. Non-notifiable shorts (positions less than 0.5%) may make this slightly higher but it would appear that the recent exchanges between the hedge funds and the company in the media have turned the tide. (Or alternatively, they’ve made their money shorting this down from 181p to 100p or so and now see the risk/return ratio as going against them).

Also noteworthy that Muddy Waters (the “egregious accounting” claimants) have cut their short from 0.93% to 0.48%. If this is a tide turning moment, as opposed to a short term hiatus, there may be scope for a short term bear squeeze rally as the shorters try further to close out their positions.


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daveinthelakes 14th Feb '18 56 of 60

In reply to post #315168

Thanks, will look at that.

You may wish to look at Juan Carlos Zuleta @jczuleta on Twitter etc. He is a world renowned expert on all matters lithium (allegedly!).

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fwyburd 14th Feb '18 57 of 60

In reply to post #315243

sorry Daveinthelakes, I meant to address my last point to you, not FrEng

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FREng 14th Feb '18 58 of 60

In reply to post #315063


I see Bacanora Minerals (LON:BCN) are relocating to the UK ahead of major debt and equity fundraising (RNS last Friday). What's your view on this? Are you buying, selling or holding?

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daveinthelakes 14th Feb '18 59 of 60

In reply to post #315343


I am holding Bacanora Minerals (LON:BCN) as I see the move to the UK as the place where many of the international mining companies locate and it is the home of the London Metals Exchange which I believe may be the largest in this regard.

The fundraise is needed to develop the resource and I just hope PI's get the chance to subscribe. Bacanora Minerals (LON:BCN) have already issued stakes to Japanese and Chinese lithium investors/offtaker's. It is only 1% of portfolio and not intending to increase unless a rights issue.

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matylda 18th Feb '18 60 of 60

Paul - If you ever get the time would be great - Complete respect for what you do regardless

Blog: Briefed Up
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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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