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Is the worst over for UK car dealers?

Pendragon shares soared after the car dealership showed margin improvement in its fourth-quarter figures. With the shares bouncing from near a five-year low, are the sector’s fortunes revving up?

Garry White

in Features


Pendragon jumped by almost 15% at the open after full-year results met reduced guidance, with earnings slightly ahead of expectations following an increase in margins in the final quarter of the year. However, the shares were bouncing from multi-year lows after falling since the start of 2016 on concerns of an economic slowdown, which hits the sale of big ticket items substantially. The sector has also been impacted by a desire by the Bank of England (BoE) to put the break on car loans plus concerns about the future value of diesel cars.

Pendragon issued a profit warning in October 2017, at which it announced a strategic shift to focus more on used cars than new. Gross margin also staged something of a recovery in the final three months of the year after taking a hit in the previous quarter.

In the year to December 31, Pendragon saw a slowdown in new car sales, which fell 4.9% on a like-for-like basis. Used car revenues were up 15.3% over the year. However, underlying pre-tax profits fell by a fifth to £60.4m.

New car sales have been falling, but the sector has also been hit by the uncertainty of the value of new diesel cars in a few years due to concerns about government policy. In the November Budget, Chancellor Philip Hammond announced tax increases for diesel cars this year, with most new diesel vehicles charged as if they were in the next tax band. From April 2018, the rate of company car tax on diesel vehicles will rise to be 4% higher than for a petrol vehicle. It is unclear what the resale value of new diesel cars will be, so many are opting not to purchase.

The Bank of England has also been concerned about the rise of consumer credit – and it even plans to include an examination of the resilience of banks’ consumer credit books, including car loans, in this year’s annual stress test of lenders. As UK car sales slowed down “car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance,” representatives of the BoE wrote in August. “The industry continues to accumulate credit risk, predicated on the belief that used car values will remain robust,” they added.

The Financial Conduct Authority, which regulates the financial services industry, began a probe into the car finance industry last April over concerns of the risk of mis-selling to consumers. When it launched the investigation, estimates put the number of outstanding car loans in the UK at £58bn, compared with about £67bn of credit card debt and £1.3 trillion of mortgage debt. These concerns may therefore be overcooked as car credit is just a small fraction of overall credit. However, the concerns may have had some impact on lending.  

Last year, Pendragon said it would sell its US division and focus on growing its domestic operations with the use of new technology. Pendragon’s software, leasing and aftersales business are all expected to continue growing strongly to 2018 and management target a doubling of used car revenues by 2021. “This will be enabled by our market leading software business to provide the online and technology platform and by investment in increasing the used retail and aftersales representation points in the UK,” management said.  Pendragon also said it was comfortable with 2018 expectations at the moment.

However, the outlook statement highlights that the new car market is expected to remain in decline, with new registrations down 6% in 2018 and 2% lower in 2019. The used market, however, is expected to grow by 1%. The backdrop therefore remains tough, but there were certainly some investors today that thought the company had passed the worst and the shares bounced from near a five-year low.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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