Pendragon shares race ahead despite a weak used car market crushing profits

Lucy White
UK Car Sales Up 8.6 Per Cent Year on Year
The results were a relief to investors in a weak market (Source: Getty)

The UK's largest online vehicle retailer Pendragon has seen its shares rocket this morning, despite taking a hit to its profits last year from the weak used car market.

The figures

Though profit shrank by £15m in 2017 to £60.4m, partly due to a 4.9 per cent reduction in revenue from new vehicles, revenue in Pendragon's used car and aftersales divisions went up by 15.3 per cent and 6.9 per cent respectively.

Gross margin fell in the third quarter, due to a reduction in new and nearly new vehicle margin, primarily in the premium sector. But this recovered in the fourth quarter as vehicle margins settled back to "more normal seasonal levels".

Read more: Pendragon shares are in reverse after the car dealership warned on profits

Software revenue lifted by 9.7 per cent, with operating profit up £0.9m, while leasing revenue rose by 39 per cent to generate an increase of £4.8m in operating profit.

Pendragon added that its net debt-to-earnings ratio was still below its one to 1.5 times target.

Why it's interesting

In the context of a weak used car market, Pendragon clearly impressed investors as its share price rose more than 12 per cent.

“An 11 per cent-plus share price hike in response to weak 2017 results from car dealership Pendragon can be attributed to investor relief that life hasn’t got worse for the company, given a difficult market backdrop for the car seller," said AJ Bell Investment Director Russ Mould.

The Nottinghamshire-based company has been pushing its software focus, which it believes offers "global opportunity".

But Pendragon is also cutting down in some areas, flogging its US business for an expected £100m and reducing the number of UK franchise locations, which is hoped to release another £100m of capital.

Read more: Pendragon reveals plans to sell its US motor business after profit warning

Analysts at both Jefferies and Liberum reiterated a "hold" rating.

What Pendragon said

“The group has a clear focus and direction to transform the business and double used revenue by 2021," said chief executive Trevor Finn.

"This will be enabled by our market leading software business to provide the online and technology platform and by investment in increasing the used retail and aftersales representation points in the UK.

"We made further progress towards our goal of doubling used vehicle revenue with growth in the period of 15 per cent. We anticipate our performance in 2018 to be in line with expectations.”

Read more: Car dealer Pendragon's shares rev up after crash as chairman and chief executive scoop up stock

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