Company Overview
London Stock Exchange-listed, Pendragon Plc is an online automotive retailer and engaged in the sale of a range of new cars, light motor vehicle, used cars, commercial vans, trucks and other motor vehicles. The group is headquartered in the Nottinghamshire, the United Kingdom. Teleios Capital Partners GmbH, Odey Asset Management LLP and Schroder Investment Management Ltd. are the major shareholders in the company. (Source: Thomson Reuters).

Key Statistics


Recent Developments
As on June 12, 2019, the group reported the outcome of the financial and operational review, in which group stated that performance of the company in FY19 could be affected further by several internal operational challenges. As a consequence, the underlying profit before tax (PBT) could be a marginal loss in FY19 (predisposal of US motor group). In the company filing, the speciality retailer also stated that the group could witness substantial losses in the first half of the FY19 ahead of returning back to overall group profitability in the second half of FY19.

On May 02, 2019, the speciality retailer reported that it has decided to sell off its Jaguar Land Rover dealership assets held in Mission Viejo, California and also decided to dispose of its trade and assets of the Jaguar Land Rover held in Newport Beach, California.

Trading Update
On April 17, 2019, the speciality retailer reported its trading update for the three months ended as on March 31, 2019. Reported revenue of the group during the period under review surged by 4.6% on a Like-for-like basis, New revenue zoomed by 6.3% on a LFL basis, Revenue from the Used car segment during the three months to March 31, this year improved by 2.9%, and aftersales revenue grew by 5.5% on LFL basis.

During the period under review, New Gross Profit slashed by 5.4% on an LFL basis, and gross profit from the used segment declined by 1.6% on a LFL basis, and aftersales gross profit slumped by 5.0% respectively.  Operating costs during the January 01 to March 31, 2019, surged by 6.2% on a LFL basis.

Pendragon Like-for-like new revenue growth stood at 6.3% in the period compared to the reduction in registration in the overall new car market of 2.4% vs the corresponding period of the previous financial year. However, the stiff trading situation during the period under review impacted the margins in new, used and aftersales segments. This led to a 5.4% plunge in LFL new gross profit, a 1.6% reduction in LFL used gross profit and a 5.0% reduction in the LFL aftersales gross profit.

This performance reflects the higher concentration of operating costs and higher losses within the car store, resulting in the underlying pre-tax loss of £2.8 mn.

However, the pre-tax loss was around £10 mn lower than the management expectation for the period.

Stock Performance
 
Daily Price Chart (as on June 21, 2019), before the market close. (Source: Thomson Reuters).

At the time of writing (as on June 21, 2019, at 09:45 AM GMT), shares of the PDG were standing at GBX 17.70 and added 2.3% against the yesterday's closing price. In the past 52-wks, shares have touched a high of 28.90 and a low of GBX 16.76. The outstanding market capitalisation of the company stood at £240.53 mn, which ranks it among the small-cap companies listed on the London Stock Exchange.

Valuation Methodology


Conclusion
The group is going through several operational changes, which in short-term could affect the group’s pre-tax profits and margins could slightly shrink in the first half of FY19. However, the group is estimating that it will return back to the overall profitability by the second half of the current financial year.

On the date of the announcement made by the group regarding operational changes, the stock has touched a low of GBX 16.76 and ended the yesterday’s session (June-20-19) at GBX 17.30, which was approximately 5% below the opening price of GBX 18.20 as on June 12, 2019 (date of announcement). The movement, as mentioned above in the stock price indicates that the stock has consolidated enough from the June 12, 2019 low of GBX 16.76. 

Also, the stock was moving towards the lower Bollinger Band®, but in today's session, the stock made a bullish reversal and was up by 2.3% approximately.

It looks that the negative part of June 12, 2019 announcement has been discounted enough and stock is consolidating. Therefore, based on the long-term profitability prospects and valuation done using the above methodology, we have given a "Hold" recommendation on the stock, at the closing price of GBX 17.30 (as on June 20, 2019), based on the 14.8x NTM Peers Median Price-to-Cash Flow-based valuation  (approx.) on the FY19E Cash Flow Per Share (approx.).

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