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Pendragon profit warning sends shares crashing

The car dealer said that it expected a "small" loss for its current year as a significant loss for the first half would not be completely offset by a return to profitability in the second

Car lot
Pendragon attributed the warning to accelerated car store losses as well as a significant increase in used car stock

Shares in Pendragon PLC (LON:PDG) crashed on Wednesday after the car dealer issued a profit warning for its current financial year.

The firm said in an update that as a result of a challenging market as well as internal operational difficulties it expected to be “significantly loss making” in its first half before returning to profitability in the second.

READ: Pendragon sells off two Jaguar Land Rover dealerships in California

However, this wouldn’t be enough to offset the initial fall and as a result the company forecast a “small” pre-tax loss for the full year.

Pendragon attributed the bleak forecast to an acceleration in car store losses over the year as well as a significant increase in used car stock at the end of the prior year and higher costs, particularly in its aftersales arm.

The owner of Stratstone and Evans Halshaw shocked the market in April with a surprise loss in its first quarter as a general decline in car sales and stricter emissions regulations have all dented demand from consumers.

READ: Pendragon shares crash as car dealer slumps to surprise first-quarter loss

The problems have also been persistent, with new car registrations falling 3.1% in the year to May and declines in sales and valuations of used cars.

Mark Herbert, Pendragon’s chief executive, said that while the expected loss for the year was “disappointing”, the company saw significant opportunities to return to profitable growth and would continue to review the business prior to a strategy update in September.

This did little to assuage the market, however, with the shares tumbling 22.5% to 17.8p in mid-afternoon trading.

“Short-term pain” needed to fix issues, says broker

In a note, analysts at Jefferies cut their target price for Pendragon to 23p from 25p and maintained their ‘hold’ rating, saying that “short-term pain” was needed to refocus the company’s strategy and address inefficiencies in the business.

The broker added that despite the significant profit downgrades, the group’s balance sheet remained safe with its net debt to earnings (EBITDA) multiples “comfortably below” its covenants.

Meanwhile, analysts at Liberum maintained their ‘hold’ rating and 22p price target on Pendragon, saying that while a tougher macro picture had compounded the company’s woes, most of the newly lowered forecast was “self-inflicted” by a legacy of the firm’s previous management, with current CEO Mark Herbert having taken over from Trevor Finn in March.

They also said that given the difficult market and a “wide range” of execution issues to orchestrate a turnaround any recovery would be “a difficult and slow process”.

“Painful recovery” likely

Also commenting on the update, AJ Bell investment director Russ Mould said while Pendragon’s new management team had completed a review and were laying out a plan to fix the business, market conditions were working against them and the recovery was likely to be “painful”.

“Businesses like Pendragon operate like a tread mill. They need to keep sales ticking over in order to maintain their health. If something bad happens, they fall off the tread mill and become unhealthy”, Mould said.

He added that the car industry was currently being “dented from all sides”, with car production falling 24% in April, the biggest decline since records began in 1995.

Mould also said that the “highly competitive” used car market wouldn’t help Pendragon’s fortunes as it was currently sitting on a massive amount of second-hand stock that needed to be offloaded.

--Adds furtehr analyst comment, updates share price--

Quick facts: Pendragon Group

Price: 8.18 GBX

Market: LSE
Market Cap: £114.27 m

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