Pendragon Plc (LON:PDG) has delivered a good set of H1 results, which are +2% ahead of our forecast at the adjusted PBT level and +9% at the adjusted EPS level. The used car strategy has worked during the period, with a significant increase in volumes driving a £10m delta in gross profit YOY, with aftersales offsetting the declines seen in the new car division on the same measure. We are increasing our forecasts on the back of this momentum in its used car business, and believe the shares look oversold with an EV/EBITDA below 4x through to 2019E based on forecast assumptions that are likely to remain at the lower end of consensus.
H1 results: Revenues were +6.3% YOY at £2472.0m (+7.3% LFL) or 3.9% ahead of our forecast. Gross profits were +4.5% YOY with margins down 20bps YOY albeit 3.8% ahead of our forecast. Operating costs were +5.0% YOY with the business having higher levels of activity as well as increased capacity in the used and aftersales segments of the market. This led to EBIT +2.2% YOY and -1.6% below our forecast (margins were -10bps YOY). Interest costs were lower than expected at £11.5m, which were -20.7% YOY and compared to our forecast of £13.5m Adjusted PBT on this basis was £48.5m and was 2.1% ahead of our £47.2m forecast. Adjusted EPS was +13.0% ahead YOY and 8.6% ahead of our forecast owing to a slightly lower tax charge. The interim dividend was flat YOY at 0,75p, albeit a progressive policy is expected at the full year. Net debt at the H1 stage was £140.1m vs. £46.6m, with the increase largely driven by working capital (c£60m YOY swing) as well as additional capital expenditure to fund the expansion of its used car business. Net debt/EBITDA remains below 1x.
Key themes: The key performance was in used cars, which saw a +20.9% LFL increase in volumes albeit at lower margin, but did deliver a £10.5m increase in gross profit (across the UK & US). Aftersales also continued to deliver robust growth, delivering a £5.3m YOY increase in gross profits. As predicted, the new car market has got more difficult and is currently -5% YTD, with Pendragon tracking this while also seeing its gross profits fall by £5.4m as a result. Elsewhere the US division continues to deliver good growth experiencing a 21.3% YOY increase in gross profits leading to a 6.4% increase in operating profits. Further acquisitions appear to be on the agenda here providing acquisition prices are attractive. Its software business also continues to progress well as it took operating profits from £4.8m to £5.5m, with Leasing experiencing strong growth albeit this was also as a function of increased fleet stock.
Forecast assumptions: We are increasing our forecasts to take account of the attractive growth in its used division. While we expect the new car business to potentially get tougher from here, aftersales appears to be absorbing these declines at present, with the momentum in the used car business at a good pace, albeit volume driven. Exhibit 1 shows our 2017-19 EPS numbers increase by 6-8% on the back of this, with our assumptions still at the lower end of the consensus range.
Valuation: As with many stocks in the sub-sector, we believe Pendragon plc has been oversold and looks attractive from a longer term valuation perspective. The balance sheet remains strong, and its used car strategy appears to be working well and more than offsetting the weakness currently experienced in the new car market. The dividend yield is approaching 5% and also looks attractive, along with its EV/EBITDA rating currently below 4x based on cautious forecasts through to 2019E.
