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Pendragon downgraded to 'sell' by Liberum after profit warning

Liberum cut its recommendation on Pendragon’s shares to ‘sell’ from ‘hold’ and slashed its target price to 10p from 22p
Pendragon
Liberum said the scale of change required at Pendragon is “immense”

Pendragon PLC’s (LON:PDG) problems are “multiple and deep-rooted”, according to analysts at Liberum.

Liberum cut its recommendation on Pendragon’s shares to ‘sell’ from ‘hold’ and slashed its target price to 10p from 22p after the car dealer issued a profit warning for its current financial year.

In an update last week, the company forecast a “small” pre-tax loss for the full year after a poor first-half performance amid difficult market conditions. 

READ: Pendragon profit warning sends shares crashing

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 pace and magnitude of estimate cuts at Pendragon is remarkable,” Liberum said.

“We have gone from a £47mln 2019 pre-tax profit forecast in April to -£6.5mln now.”

“With £4.6bn of sales and a 0.5% EBIT margin, operational gearing is extreme and the new management team faces an uphill battle.”

Liberum said the scale of change required is “immense” and tough market conditions will not help.

The broker acknowledged that the new chief executive, Mark Herbert, and new chief financial officer, Mark Willis, have been dealt a “very poor hand” by the previous management team, which had built up used car stock at the end of 2018 and is now being cleared at a significant cost to margin.

“We would like to think that, once cleared (by the end of the second quarter), there will be a clean slate and a good opportunity for recovery,” Liberum said.

“Our concern is that, while execution could be improved, many of the issues are deep-rooted and possibly cultural.”

“To effect change at head office and across c.180 dealerships will not be easy and it will take time to change behaviour (eg used car buying and selling practices).”

In mid-morning trading, shares edged down 0.8% to 17.75p.

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