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Pendragon’s results cause concern

The Pendragon results finally stemmed a year of share price decline, which has had analysts worried and shareholders perplexed.

The cause of the share price revival was a substantial lift in the dividend. While the shareholders were pleased by the bumper payout, analysts worried that the decision by Pendragon’s board to pay the extra money was just to keep investors on-board with the strategy of big-scale acquisition.

The shares rose from 60p in mid-2005 to a peak of 132p just before the start of the takeover action. They fell back to 90p just before the results announcement and gained 15p on the results.

Thanks to the Reg Vardy acquisition, revenues were up by 55% to £5.1bn, which puts Pendragon ahead of the field in UK car retailing by a margin of £2bn.

The underlying growth in earnings per share was up 12% to 7.5p, while the dividend that would normally be expected to track earning growth made a step change to 3.45p – an increase of 31%.

Analyst Robert Brent of stockbroker Peel Hunt says: “You have to remember that the shares went through this sort of cycle during and after the previous big acquisition, CD Bramall. Also there is concern that we could be heading into a period of higher interest rates.”

Highly geared car retailers like Pendragon get a double negative from high interest rates as car demand typically falls. The interest bill with less than a full year of Vardy acquisition costs was up from £43m to £67m.

Oliver Wynn-James of Panmure Gordon was taken aback by the change of tone in chief executive Trevor Finn’s statement. “The outlook statement was positive, which represents a U-turn compared to November’s gloomy statement and profit warning. It is too early to become bullish.”

Wynn-James said that it was the big dividend lift that “saved the day”. Otherwise the share price might have “continued to drift off”.

The mix of business after the acquisitions of last year mean that there is a massive dependence on the world’s two most unprofitable car companies, Ford and GM.

More than half the dealerships – 215 out of 396 - are in one group or the other. The top five exposures are: Ford (including PAG) with 150 dealers, General Motors 65, Peugeot Citroën 24, Fiat 18 and Renault 13.

Pendragon owns all 10 UK dealers for Cadillac within the GM group, which lost more than £3m last year.

It also runs 10 of Ford’s Aston Martin dealers in the UK, which were cited as being one of the major factors in the profit increase this year.

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