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Pendragon still looking to buy despite profits tumble

Pendragon, Britain’s leading consolidator of auto retailers, has stumbled to a 25% drop in earnings compared with the first half of last year according to figures published on August 7.

Revenues of £2.7bn for the first six months of the year were up just 3% while earnings per share fell 25% to 3.5p. That performance was slightly better than indications given in a profit warning just before the June 30 close of the trading period, and the share price rallied initially by 9% to 81p. That price was still well short of the 125p high in May and valued the company at 35% less than its best.

Chief executive Trevor Finn said that the motor retail sector had faced “a challenging time” so far this year but that he was determined to press on with more – though smaller – acquisitions, such as the 19 dealers just bought from the Dixon Motors receiver at a knockdown price.

The operating margin was down to 2.3% compared with 2.8% - ratios richened by the 13.3% operating margins from the Support Services division consisting of contract hire and leasing, dealership management software - now sold to third parties, and wholesale parts distribution.

They earned 20% of the group's total results.

Pendragon strengthened the support for the share with another above-average increase in the dividend – by 38% to 2p for the interim.

Finn said that the main difficulty in trading was a slowdown in consumer demand meeting cars forced into the market by manufacturers incentives and pre-registration by dealers which hit used car margins.

The good news is that the succession of dealership and property sales has helped Pendragon meet its debt targets early. Finn said: “At 86% we are pleased to have achieved the target level of gearing six months ahead of plan.”

Finn believes that the market is heading for a significant setback this year and next as the interest rate hikes bite. “We had profit falls in 1991 at the start of the recession and in 1999 at the time of the “Rip-Off Britain” campaign.

“We are a retail business; retail feels the downturn in consumer demand first and it is usually noticed first by the sector leader. That is why we have said what we said and that has been the cause of the share price decline.”

But he conceded that new car retailing was “not as profitable as it was” and that he was “open-minded on car supermarkets.”

“If the vehicle makers go on trading through supermarkets we will end up in supermarkets ourselves,” he said.

All the rebranding of the group has been done with all volume in Evans Halshaw (including the newly acquired Dixon sites) and under the Stratstone name for luxury brands.

Finn said that Dixon’s downfall had been: “Over investment in facilities at the wrong moment.”

“There was a narrow portfolio of brands and the facilities were under-utilised.”

He was offered Dixon dealerships before the receivership. “We picked our purchases for geographic fit. The price for the package was very good value.”

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