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Pendragon PLC Full year results due 14th February – Zeus Comments

We anticipate a robust set of full year results from Pendragon Plc (LON:PDG) next week, with the shares +13% in January following a poor performance in 2016 (-33% in absolute terms). It will be interesting to note any change in sentiment within each of its key divisions during H2 when private registrations have seen consistent YoY declines for more than 6 months based on SMMT data. We have prudent forecasts in place for 2017 following a sector downgrade in November. We suspect current trading for Q1 will be robust based on current industry trends, but do anticipate a more difficult outlook as we progress through the year thereafter.

Full year results due 14th February: We expect a solid set of full year results from Pendragon next week. We forecast 15.9% revenue growth with slightly lower operating margins of 2.1% vs 2.3% achieved in 2015A, driven by changes in the mix and cost pressures starting to come through, generating £99.2m of operating profit. We have assumed lower interest costs of £27m vs 2015A leading to an adjusted PBT figure of £72.2m, representing 3.0% growth on the £70.1m delivered last year. We anticipate adjusted EPS of 3.7p, which is 0.5% ahead of the 3.6p delivered last year. We expect a final dividend of 0.9p vs. 0.8p last year equating to an attractive yield of c5%.

Key themes: The company delivered a strong Q3 interim management statement in October where the company reported robust trading patterns despite Brexit uncertainty with like for like sales growth of 5.7%. New gross profit was up 4.2% on a like for like basis, we would expect a slowdown in this growth given the declining private registrations during the second half of the year and ongoing consumer uncertainty. Used and aftersales gross profit was up 0.5% and 3.2% respectively, we expect another robust trading performance in aftersales given the continued growth of the UK car parc. The company has been investing the used car business, accelerating the rollout of ‘Sell Your Car’ and setting aside £100m investment to deliver growth in used car sales. As at the Q3 IMS the company had completed £6.1m of the £20m share buyback programme announced in May of last year, we estimate that the total share buyback to date will be at c.£7.0m.

Forecast assumptions: Following our sector note published in November, our 2017 EPS forecasts are 17% below consensus estimates. Weakness in the new car market coupled with cost pressures faced across the sector are likely to provide headwinds to earnings growth through the forecast period. Pendragon plc has a robust balance sheet (2016 net debt/EBITDA of 0.5x) consistent with others across the sector.

Valuation: At the current share price Pendragon Plc trades on 9.6x FY16E P/E rising to 10.6x in 2017 earnings (we are forecasting a 9% drop in EPS YOY). This represents a 24% premium to the other listed motor retailers in 2016 rising to 44% but a 25% discount to the wider retail sector with the EV/EBITDA broadly in line with the UK dealer average on sub 5x. There is solid asset backing in the business with H1 2016 property assets amounting to £375m covering >70% of the current market capitalization. While we believe the shares are undervalued on a long term basis we believe there are better opportunities elsewhere in the sector with Vertu Motors Plc (LON:VTU) and Cambria Automobiles Plc (LON:CAMB) both trading on prospective P/E multiples of c7x with greater levels of asset backing.

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