Pendragon PLC – Overbought stock while the outlook remains in the doldrums.

Pendragon PLC (LON: PDG) is a FTSE All-Share listed Motor Retailing Company. It mainly operates through three businesses: UK Motor, Software, and Leasing.

Investment Rationale – Sell at GBX 15.58

• Price/Cash Flow multiple is overvalued, and Dividend Yield is lesser than the industry average of Consumer Cyclicals industry.
• From a technical perspective, 14-Day RSI (81.814) is signifying an overbought situation, and thus, short-term correction can be expected.
• Over the past four years, the gross margin and EBITDA margin have remained below 12% and 4%, respectively, which is significantly lower than the industry median.
• Reported revenue plunged 13.8% year-on-year in Q3 FY20 while LFL gross profit fell 9.8% during the same period.
• The financial guidance was not reinstated given the material macro-economic uncertainty that exists once government support measures are withdrawn.

Risk Assessment

• The heavy reliance on a few large customers poses uncertainties to the obtained revenue.
• Increasing competition can also put pricing pressure in the future.
• Moreover, failure to adopt the technological changes can reduce the level of business.
• It has also been trading cautiously during ongoing economic uncertainty post Brexit. In the short-term period, the market environment is likely to remain uncertain and volatile because of Covid-19 mayhem.

Recent News

7 September 2020: PDG agreed to dispose of its assets pertinent to Jaguar and Land Rover motor vehicle dealership (located in Los Angeles). The expected consideration from the transaction is nearly £15.8 million.

Interim Management Statement - for the period from 1 July 2020 to 30 September 2020 (as on 22 October 2020)

• The underlying profit before tax increased by £24.3 million, reflecting 810% jump against £3.0 million in Q3 FY19.
• The Franchised UK Motor division improved profit per unit and performed ahead of expectations.
• Like-for-like (LFL) revenue declined by 1.2% while LFL gross profit fell 9.8% year-on-year.
• At the end of September, net debt reduced to £26.9 million (at the end of H1 FY20: £46.0 million)

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion – Take Profits Off the Table

PDG is targeting an underlying profit before tax of £85-90 million by FY25. However, the Company remained cautious about the outlook for Q4 FY20 given the prevailing macro-economic uncertainty, and therefore, it did not reinstate financial guidance for FY20. Moreover, rising unemployment can present uncertainties to future trading conditions. Another round of coronavirus lockdown and Brexit uncertainty can significantly impact sales volumes. Further, the stock is trading close to a 52-week high while the RSI 14-day is indicating an overbought scenario. Therefore, it is advised to book profit now and reinvest the profits and principal amount at the right price. Stock 52 week High and Low were GBX 17.84 and GBX 4.02, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Pendragon  PLC at the current price of GBX 15.58 (as on 26 October 2020, before the market close at 9.25 AM GMT+1), while we look forward to reviewing the support from upcoming catalysts to reinvest.  

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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