Pendragon trading on track says Zeus

Pendragon plc (LON:PDG)’s pre-close trading update for the first half of FY22 shows an expected underlying PBT of c. £33m (H1 FY21: £35.1m). This strong performance is in spite of the removal of £8.3m of government support and c. £7m of incremental marketing costs invested in building the used car proposition. Higher margins in new and used cars continue to more than offset the profit impact of lower new vehicle sales volumes caused by supply constraints. Zeus forecasts are unchanged today – the expected FY22 60:40 PBT split between H1 and H2 seems prudent, in our view, given the macroeconomic and vehicle supply uncertainties.

¨ Trading update: As was also flagged in trading update for Q1 on 27 April, new vehicle volume continues to be impacted by supply constraints. UK total new car registrations were down 11.9% YTD in June 2022, which is the second worst H1 performance for 30 years. However, Pendragon’s focus on maximising margins has meant that new gross profit per unit (GPPU) increased and more than offset volume shortfalls. Used car GPPU remained elevated, albeit below exceptional levels seen in H2 2021. Used car residual values are starting to return to normal depreciation patterns, dropping 0.9% in June according to Cap HPI, which is still less than the pre-pandemic 1.4% June average drop. Pendragon’s aftersales revenue and profitability were both higher than H1 2021. Underlying operating costs were c. £20m higher in H1 2022 due to the removal of £8.3m of government support, a c. £7m increase in marketing costs, and general inflationary pressures, offset in part by cost savings. This marketing investment to develop the used car proposition and Car Store brand is H1 weighted, with c. £3m planned for H2. Group adjusted net cash at 30 June 2022 was £2.8m, up from net debt of £49.7m at 31 December 2021, demonstrating how good trading momentum is strengthening the Group’s balance sheet.

¨ Forecasts and outlook: With our full year PBT forecast of £55.3m for FY22 and the estimated H1 result of £33m, this implies an H2 forecast of £22.1m. In FY21, H2 underlying PBT was £47.9m. Our forecast H1:H2 split in FY22 of 60:40 is broadly in-line with pre-pandemic PBT splits in the sector and seems prudent given the potential for weaker consumer demand in H2. Management expects underlying PBT to be in line with expectations, so we make no changes to forecasts.

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¨ Valuation: Based on Zeus forecasts, Pendragon is trading on a P/E of 6.7x FY22, which is broadly in line with the average of Lookers and Vertu (6.2x). This multiple is far below the through-the-cycle range of 8-14x that we have mentioned in prior notes, making the company look significantly undervalued at these levels. Our SOTP note from 5 April 2022 highlighted the value each business unit, using Zeus FY22 forecasts, arriving at a value estimate of 38.6p per share. Zeus analysis puts a 20.1p value on Pinewood (software business) alone, suggesting the combined group is significantly undervalued at the current share price.

Summary financials

Price20.9p
Market Cap£292.0m
Shares in Issue1,396.9m
12m Trading Range14.8p– 28.9p
Free float68.50%
Next EventInterim results – September 2022

Financial forecasts

Yr end Dec (£’m)2021A2022E2023E2024E
Revenue3,421.303,617.703,784.403,945.40
yoy growth (%)23.75.74.64.3
Adj. EBIT†117.486.193.3100.3
Adj. PBT†84.455.35864.4
EPS (p) dil. Adj.4.93.13.13.4
DPS (p)
Net (debt)/cash^-49.7-36.6-29.2-19
P/E (x)4.26.76.86.1
EV/EBITDA (x)2.22.62.42.2
Div yield (%)
Continuing operations <br>^ Excludes IFRS 16 leases and stocking loans <br>Source: Audited Accounts and Zeus estimates

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