Yahoo Finance Car dealer Pendragon warns on profits as consumer demand 'wanes'
Car dealer Pendragon has sounded the alarm about health of Britain’s automotive industry, issuing a profit warning it blamed on falling demand for new cars and lower prices in the used market.
The warning - which came in an unscheduled update that also revealed Pendragon chairman Mel Eggerton was stepping down with immediate effect - sent shares in the company down almost a fifth.
Concerns about motorists’ willingness to splash out on new vehicles also dragged down peers, with Inchcape and Lookers dropping almost 5pc.
The warning comes as industry sources say that new car registration figures are “bloody”, with another big drop expected when the monthly data are issued at the start of November. Uncertainty caused by Brexit and the weaker pound are being cited as the main causes of the slowdown.
Pendragon - which owns the Evans Halshaw and Stratstone dealerships - said it now expects to post a pre-tax profit of £60m in 2017 against market expectations of £75m, and some £15m below last year’s figure.
Profits are forecast to start to rise again in 2018, the company said. It added that during September "as consumer confidence waned, we experienced significant market pressure".
Pendragon cited “unprecedented pressure” on margins in the premium car sector as “certain manufacturers continue to force vehicles into the market despite softening demand”.
This has maintained sales of upmarket cars but the company has earned less from them, while the volume sector has suffered a 13pc drop in sales.
As a result, profit in the new car business fell 20.7pc in the third quarter, and was 10.2pc lower in the year to date on a like-for-like basis.
Secondhand car sales also suffered, though not to such a great extent. In the quarter profit was down 20.3pc in the quarter but 2.1pc higher in the year to date.
The company said it had suffered a price correction in used cars because of the controversial practice of “pre-registering” - when a dealer registers cars to hit sales targets or manufacturer incentives and then sells them at a discount.
Pendragon was buoyed by steady aftersales demand, such as servicing. This is the largest profit generator for the business, and the company said that as the number of older cars on the road rises thanks to falling new car sales, it expects this unit to grow.
Trevor Finn, chief executive, said following a strategic review, the company is “committed to focusing on reshaping the business” with an emphasis on online technology, and that Pendragon “remains committed” to doubling revenue from its used car business by 2021.
He also appeared to fire a warning shot at premium manufacturers the company blamed for falling margins, with the company saying it was running a “strategic review of premium brands" to look at "the investment appeal of their dealer proposition".
"We will review capital requirements by manufacturer and only allocate capital where we see strong future prospects for reliable returns," it said.
Manufacturers increasingly require huge investments from dealers for showrooms to sell their vehicles, with some of these outlets costing as much as £10m to build.
Pendragon also said its US arm would not be making further acquisitions and hinted at the potential for a disposal, adding “in light of our capital allocation priorities, it would be appropriate to assess the ongoing value of this business to the group”.
Will Kirkness, analyst at Jefferies, said the 20pc profit downgrade “would not be taken well but has been largely delivered by exceptional pricing pressure from two premium manufacturers. This has driven an enhanced and accelerated strategic review. If implemented successfully, this could drive a higher return business with greater consistency.”
