Underlying EPS of 1.77p is indicative of a share price (intrinsic value) of 17.7p using a PE ratio of 10, justified theoretically by generic assumptions of zero EPS growth and a sustainable dividend cover of 2, combined with a 5% dividend yield. The certainty of further dilution via warrants, options and options yet to be created suggests there is not much of an under-valuation here at an SP of 13.5p.
EPS of 2.3p for 2011 is indicative of a share price of 18.4p on a conservative P/E of 8. Extrapolating this for 2012 with reduced interest charges indicating a net profit of circa £45m we get an EPS of 3.17p. On a P/E of 8 this indicates a share price of 25p. Consequently I view Pendragon as a strong buy at the current asking price of 13.5p.
It cut off the "£1.5m" anticipated operating costs for Quicks. I would view this business to be a positive factor going forward because it ensures that Pendragon has presence in all sectors of the market and they will use the internet for marketing once again.
After reading your comments I thought I would look at the AR again and make the following observations.
In the retail motor trade profit from car sales has to be only a small proportion of sales due to the vast majority of sales revenue going back to the manufacturer and 20% VAT going to the Government. Add in the current economic climate and you get the very slim margins on new car sales. That is why car sales are used to get after sales which is where Pendragon is concentrating its strategy. Gross margin for after sales is 59.6%, compared with 7.9% for new car sales and 9.7% for used car sales. You will see the margins have held up well considering trading conditions. So that is positive.
They also comment on their internet presence and new phone apps which is another major positive.
However the most profitable businesses are the support businesses, the star of which is the Dealer Management Systems service. It also includes the parts wholesale business, Quickco, which is one segment they should be concentrating on and I will be contacting the company regarding this. It is a differentiator between them and Lookers and they need to be more competitive.
Obviously the major event was the rights issue and to my mind this has had a very positive outcome, not only through reducing the finance costs going forward but also taking care of the pension black hole and therefore reducing the cost of pension contributions going forward. You will see that the CEO is a pensioner and is no-longer part of the pension scheme.
Re the remuneration reports I would leave them to the large investors to look at.
EPS - Since this is viewed as the main share price driver obviously they need to concentrate on this, but most importantly they need to provide dividend income in order for the shareholders to hold shares rather than just trade them.
Quicks - I found this comment on page 31. This will enable them to compete with other car supermarkets.
"The Group is continuing to develop its new venture in the used car market, “Quicks”, which has incurred start- up costs and operating losses of £4.8 million in 2011. The Quicks operation has grown to seven sites during the year from four in the prior year. The volume of used cars sold through the Quicks businesses in the year was 6,700. This represents a throughput per site of 950 which is higher than the average in our Evans Halshaw division. During 2012 we will be focussed on ensuring that the Quicks business generates improved performance. This will be achieved through:
improved team efficacy to generate greater sales volume and profitability per car per team member increased brand awareness through our internet presence improved stock mix profile and pricing
As a consequence of the expected time it will take for the improvements necessary to reach our required standards in the Quicks business, we anticipate the operating costs invested in 2012 to be approximately
I'm glad you're trawling through the annual report, not me. The real problem with PDG profits is that they are small for a company with a £3.5b turnover, so exceptioanals can have a disproportionate effect. Next year you will see EPS restated as 1.77p when comparisons are done with 2012 figures. Then EPS of 1.9p will be trumpeted as progress!
AR11 pages 54 to 64 (inc) ... 11 pages of waffle! * The directors appear to have a "Right Plethora" of reward schemes for themselves. * I feel it has been a particularly "un rewarding" waste of my time trying to understand this distasteful gibberish. * ... The TSR chart on page 61 did make me smile though! * *** Further Comment *** When the share price was on the floor, any potential threat posed by this sort of stuff was neutralised (IMO). * An investor who is serious about paying 13p + might need to consider the directors incentivisation schemes more carefully than I have... I am very much inclined to dismiss the whole set up of schemes as just a "market milking scam"
Quote from page 33 ... "The Groups key measure of return to shareholders is underlying earnings per share" * A brief look at page 56 suggests Directors performance related pay is linked to "Adjusted EPS" * Underlying EPS of 2.3p is mentioned on pages 7, 30, 67 and 89... no attempt is made to explain that it would be more realistic to calculate it as £25.1m / 1,420 m = 1.77p (or with possible dilution 1.7p say) * *** Non GAAP measure *** GAAP = Generally Accepted Accounting Practice (or something like that). * Underlying EPS is labelled as a Non GAAP measure on pages 67 & 89. * *** Extract from page 89 *** The directors consider that the underlying earnings per share figure provides a better measure of comparitive performance.
*** AR11 ..note 2.6 page 84 paragraph 3 *** It seems that non underlying profit has masked losses of £4.8m up from £2.8m in the previous year for the Car Supermarket start up business operating under the Quicks brand... For how much longer will this be a drain on the Groups profits? (7 outlets exist at present ... page 5) * *** Other non underlying items *** Are turned positive by tax refunds and provision reversals (page 83)
I like the way the independent finishes the article. Clearly a buy recommendation!
Pendragon also reported a surge in sales of white cars. "It's one of the top five colours for new car buyers," said Trevor Finn, the chief executive of Pendragon, yesterday. "Every 10 or 15 years there's a cycle where white cars become very fashionable, and we're now in it."
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