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

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.

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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 cars could become self-driving, hence fewer people would want to buy their own car. I've also seen press reports that fewer young people are learning to drive, thus likely to reduce demand for new & secondhand cars.  We also then have upward cost pressures. So the sector as a whole is facing a lot of headwinds.

In line with expectations - there's a broker note issued today, which is available on Research Tree. I'm reading that now. It says that the 2017 results are in line with expectations set in Oct 2017 - which were reduced expectations, that triggered a sharp fall in share price at the time, from 30p to 22p.

I nipped in and bought a few shares at 22p, which was a good entry point short term. I  remember that trade, as I was drinking a can of Marks & Spencer pina colada, on a train from Reading to London. I recall being a bit concerned that the pleasant, pineappley glow that the drink was giving my train journey might have impaired my judgement in buying shares in a car dealer.

 

The usual Stockopedia graphic shows the sharp reduction in full year 2017 EPS expectations in OCt 2017. The narrative today also mentions that the group had a tough Q3, but that Q4 improved;

Apologies all round - this article conked out earlier on.

I'll try to finish things off, when time permits, but I'm feeling exhausted & flaked out. So will try my best to finish off, but can't promise anything. Think I need a break.

Regards, Paul,.