Pendragon Plc – Decent Fundamental Performance Amid the Downturn Scenario

Pendragon Plc (LON: PDG) is a FTSE All-Share listed Motor Retailing Company. The Group operates mainly in three businesses: UK Motor, Software, and Leasing.

Recent News
On 29 May 2020, the Group had entered into a sale and leaseback agreement with Al Mana Property International Limited. The purpose of the transaction was property investment.

Trading Update for Q1 FY2020 (period from the 1 January 2020 to 31 March 2020)
On 21 May 2020, Pendragon released an update of the trading performance with actions taken to combat COVID-19 outbreak. The Group’s performance in the first two months of Q1 was encouraging and started March 2020 trading strongly. Still, due to imposed lock-down and subsequent retail store closures, the underlying profit before tax got affected.

Despite the negative impact of coronavirus outbreak, the loss before tax for Q1 stood at £2.3 million (Q1 FY19: loss of £2.8 million). The Group has opened the 125 service centres and is operating at reduced capacity with new safety procedures.

PDG has taken measures to preserve cash, and the senior management has agreed to take reduced salaries. As on 20 May 2020, the net debt stood at £100.5 million and total facility of £235 million.

Share Price Performance

1-Year Chart as at July-02-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Pendragon Plc’s shares were trading at GBX 9.25 on 2 July 2020 (before the market close at 8:50 AM GMT+1), which was up by 2.89% against the last day closing price. Stock 52 week High and Low were GBX 17.00 and GBX 4.02, respectively.

From the technical standpoint, 14-day RSI (Relative Strength Index) is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology


Key Risks
The UK automobile retail sector was facing a series of challenges even prior to the spread of the Coronavirus, including new vehicle supply issue, weakening of Sterling, pressure of WLTP (Worldwide Harmonised Light Vehicle Test Procedure) regulations, continuous cost pressure, and political uncertainties. The Group has also been trading cautiously during ongoing economic uncertainty post the UK's exit from the EU.

Conclusion
The Group is expecting a significant and attractive market opportunity for the car store. The Company is also expecting a recovery in profitability during the second half of 2020. PDG’s management is fully focussed on maximising performance in the near term.

Moreover, the four-pillar strategy of the Company is focussed on creating stand-alone used car brand, stable platform in Franchised UK Motor division, generating growth in Pinewood and further powering their leasing business. Also, the Company has deferred the commitments related to capital expenditures, marketing spends programme and monitoring inventory level. However, COVID-19 has not impacted the Group materially, and the Company has been maintaining solid liquidity to manage any unforeseen financial shock.

Therefore, the Group will have the competencies in place to meet the full desires of the clients across used, new and aftersales, as well as driving the “We come to you” online offer. Overall, the Company is well-positioned to capture the market opportunities arising through the scope of consolidation.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the current market price of GBX 9.25 (as on 2 July 2020, before the market close at 8:50 AM GMT+1) with lower double-digit upside potential based 0.09x EV/NTM Sales (approx.) on FY20E sales (approx.).

Topps Tiles Plc - Sales Pick Up as Stores Re-Open

FTSE All-Share listed Topps Tiles PLC (LON: TPT) is a Leicestershire, United Kingdom-headquartered retailer of tiles, which supplies tiles and associated accessories to both trade and retail customer base for the refurbishment of domestic housing.

Q3 Trading Update
On 1^st July 2020, the Group provided a trading update for the 13 week period ended 27^th June 2020, with average sales per week growing to £3.9 million in the final week of June (when all stores were trading) from £0.8 million during April 2020 (when all stores were closed). However, the average sales per week was 5.4% below the same week in the previous year on a like for like basis. The Group said retail trading over the third quarter of 2020 improved significantly, following the gradual re-opening of stores from the end of May 2020. The retail revenue for Q3 FY20 was still half of the corresponding period of the last year at £1.9 million, while commercial sales reduced by 16% to £1.4 million in the third quarter against the same period last year.

As per the liquidity position at the end of the quarter, the Group had net cash of £3.9 million, with available cash headroom of £52.9 million. The Group has strengthened the financial liquidity through the sale and leaseback of the central office and warehouse facility.

Share Price Performance

1-Year Chart as at July-02-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Topps Tiles Plc’s shares were trading at GBX 50.00 on 2 July 2020 (before the market close at 8:52 AM GMT+1), which was up by 4.17% against the last day closing price. Stock 52 week High and Low were GBX 81.80 and GBX 25.00, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an upward trend in the stock.

Valuation Methodology


Key Risks
The continuous weakening in home improvement spending has affected the financial performance of the Group. Also, the Company is facing challenging conditions after Covid-19 outbreak.

Conclusion
The Company has demonstrated the resilience, with revenues ahead of the anticipations, and has shown strong financial liquidity. The Group also witnessed strong growth in the online business, the encouraging initial customer response to the phased programme of store re-openings, and the development of a collection-only store model. Moreover, it has taken numerous actions to strengthen financial liquidity over recent weeks. The Company is looking to expand the commercial business with the Strata Tiles acquisition. Thus, it will take an entry in a large and attractive market through Parkside commercial segment.

Moreover, TPT is focusing on the retail offer and established commercial operations, which provides the Group with a strong platform to deliver sustainable growth over the medium and long term. Overall, the Group is on-track as the economy begins to recover.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current market price of GBX 50.00 (as on 2 July 2020, before the market close at 8:52 AM GMT+1) and will recommend fresh buying at the right time.
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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