Why Pendragon shares just plummeted

Another profits warning triggers a slump to multi-year lows, but is this stock stuck in reverse?

With driving conditions in the motor trade remaining bleak, the last thing Pendragon (LSE:PDG) investors needed today was for a new management team to reveal a host of problems under the bonnet of the UK's biggest car dealership.

The updated assessment on Pendragon for this year is that it will now make a small underlying loss compared with the profit of around £31.4 million expected previously by City analysts. Shares skidded more than 20% to leave the Stratstone and Evans Halshaw forecourts owner trading at a near-seven year low of below 18p.

One of the biggest factors behind the sharp decline in profitability is the performance of online marketplace Car Store, whose losses are set to accelerate despite encouraging growth in volumes.

Other reasons for today's downgrade include an excess of used car stock across the group, as well as lower-than-expected new car margins and an increase in costs, particularly in aftersales.

Source: TradingView Past performance is not a guide to future performance

The wider car market remains difficult, with the industry recently reporting a decline in new car registrations of 3.1% in the year-to-date to May. The second-hand car market is also seeing significant declines in valuations.

Pendragon said:

"In addition to the challenging market, FY19 performance is expected to be impacted further by certain internal operational challenges."

This assessment follows a business-by-business review undertaken by Mark Herbert, who recently took over as CEO from long-time boss Trevor Finn. Herbert intends to reveal more details on his plans for the business alongside interim results in September.

He sees "significant addressable opportunities" to improve the business and to return to profitable growth, including from self-help measures in the core UK motor and leasing businesses. In the meantime, the priority is to deliver a refocus of the strategy at Car Store.

This business allows customers to browse over 5,000 AA inspected cars, pay for them online and choose one of 32 UK stores to collect their purchase from. While Pendragon sees this as an opportunity for future profitable growth, Car Store losses for 2018 of £11.9 million are expected to rise to about £25 million in 2019.

Significant management time has already been spent on the Car Store issues, with Pendragon hoping to see this reflected in an improvement in group profitability from the second half of this year.

Analysts at Liberum, however, warn that the recovery process is likely to be difficult and slow, particularly given the number of execution issues that need to be fixed.

Pendragon's debt ratio is well within covenant levels, with previously announced US disposals of £60 million expected to further boost the position in the short term. Joint house broker Berenberg cut its target price on the stock to 17p today.