Pendragon: Progress on multiple fronts

Pendragon plc (LON:PDG) has announced interim results for the six months to 30 June 2021, which are ahead of guidance and our expectations. The Group has made strong progress in terms of growth, cost efficiencies and strategic implementation to ensure further progress can be made.

  • H1 results: The underlying PBT of £36.1m (excluding £1m of discontinued losses) was usefully ahead of guidance and demonstrates a major turnaround compared with the prior year’s interims. Underlying operating profit for each of the business units was broadly comparable with the figures reported for the second half of 2020. The balance sheet has also strengthened significantly vs. last year. Adjusted net cash (ex IFRS 16 leases and stocking loans) stands at £9.5m vs. £46.0m net debt YOY.
  • Key drivers: The main driver of the turnaround versus H1 2020 was Franchised UK Motor; its underlying result improved from an operating loss of £18.1m to a profit of £37.6m. Revenue was up 57% at £1,673.8m, with Used revenue up 53.4% (at £781m), New Car up 65.5% (at £761.7m) and Aftersales up 34.2% (at £131.1m). Pinewood continues to perform well with revenues +12.0% to £12.1m, with international users increasing by 14%. Leasing performed well in this area of the market and saw revenues +31.7% to £49.0m driven by a 90% increasing in de-fleet vehicle disposals given the current environment.
  • Outlook: While Pendragon has clearly delivered a strong H1 performance, we believe the outlook statement is suitably cautious given the supply pressures that are building at present particularly in new cars. We believe the demand for new cars remains strong and is reflected in a stronger September order bank for this year vs. last. The key delta remains when these cars arrive – whether that’s Q4 2021 (calendar) or Q1 2022. The used car price inflation we have seen is expected to continue going into H2 2021.
  • Forecasts: We are maintaining our headline forecasts post these results, which are at the lower end of management guidance for 2021.
  • Investment view:  We remain confident that Pendragon will hit its strategic target of £85-90m underlying PBT by 2025, perhaps even a year earlier. The outperformance this year moves the company much closer towards this target, but we do expect some degree of used car price and margin normalisation next year.  We have previously stated that, at £85-90m of PBT, the value per share of Pendragon would be over 50p. Discounting this back on a risk-adjusted basis at 12.5% provides a valuation of 33p, up from our previous 28p estimate due to the passage of time.
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