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Liberum initiates Pendragon at ‘hold’, says it is “not convinced” by standalone used car proposition

In a note to clients, the broker said the “volatile track record” on used cars left them less than convinced on any longer term profitable growth prospects
Cars lined up
Pendragon said in October that its third quarter profits had been hit by new emissions standards

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.

READ: Pendragon's quarterly profits hit by new emissions standards

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.

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