Analysts at City broker Liberum have initiated coverage of Pendragon PLC (LON:PDG) with a ‘hold’ rating and 24p price target, saying they are “not convinced” by the firm’s proposition and that the long-term risk/reward profile was “not attractive”.
In a note to clients, the broker said that while it liked the group’s dealer software business Pinewood, it was “unlikely to be a game changer”, adding that the “volatile track record” on used cars left them less than convinced on any longer-term profitable growth prospects.
With the firm’s growth contingent on its ambition to double its market share in used cars to 10% by 2021, the lack of activity in the consolidation of the UK car market meant this would be difficult.
Analysts also said that with Pendragon’s management guiding for a £50mln pre-tax profit for the full year, there was “a lot to be done in Q4”, aiming its own forecasts lower at £46.6mln.
One silver lining for the broker was the prospect of short-term upside from the sale of the company’s US business, which was expected to bring in £100mln in proceeds.
“While a one-off cash return to shareholders of US disposal proceeds would be very attractive relative to the current market cap, we would not expect a sustained re-rating subsequently”.
The car dealer has been struggling in recent months after reporting a slump in third-quarter profits in October and predicting a fall in full-year profits as new emissions standards impacted its earnings.
At the time, Pendragon said the new legislation has had a “short-term dilutive effect on profitability”. Underlying profit before tax for the quarter fell to £1.1mln in the three months to September 30 from £3.0mln a year ago.
In late-morning trading Tuesday, Pendragon shares were down 0.2% at 24.9p, just 3.7% above Liberum’s target price.