Pendragon calls for an extension of scrappage

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Pendragon, the UK's biggest car retailer, says the worst is over for the beleaguered automotive industry, but it is calling for the Government's cash-for-bangers scheme to be extended.

The company, which includes the Stratstone and Evans Halshaw dealership chains, posted first-half pre-tax profits of £11.4m yesterday, down by nearly half from last year's £21.1m, on revenues down 36 per cent at £1.58bn. But the results were a major improvement from the £201m loss for the group's last financial year.

Pendragon is not alone. The global car industry has had a battering for 18 months, hit first by sky-high petrol prices, then by the sharp brake on consumer spending as recession hit. But there are signs of recovery. Although UK motor sales are still down by 22.8 per cent over the year as a whole, new registrations rose by 2.4 per cent last month, the first sign of growth since April 2008.

Central to the improvement is the Government's scrappage subsidy, which offers a £2,000 discount on a new car to a buyer trading in a clunker of 10 years' old or more. So far around 155,000 people have bought a new car through the scheme, which is funded half-and-half by the Treasury and the car industry. But if the current run rate continues, the £300m pot will run out in November.

Trevor Finn, Pendragon's chief executive, says scrappage should be extended. "It is a scheme that consumers like, that retailers like, that manufacturers like, and that component-makers like," he said. "Almost by chance the Government has found a sweet spot that is a win-win for all interested parties, and puts greener and safer cars on our roads. The logical question is, why wouldn't we continue it?"

The crux of the argument is that the majority of those taking advantage of scrappage are "incremental business" – that is, people who would not otherwise have bought a new car. The result is a £1,000 VAT boost, on average, for the Government, which cancels out the Treasury's half of the subsidy. "It is funding neutral," Mr Finn said.

But even without scrappage, the market is stabilising. Used car prices have risen more than 20 per cent this year, which will slowly push more people to buy new cars. "Though the rising used car price hasn't yet come through in the numbers, the bottom would appear to have been in about December last year," Mr Finn said. Pendragon's vastly improved performance in the six months to June is thanks to a strict cost- cutting programme that has sliced £60m out of the group's running costs and allowed it to make a profit from much lower levels of activity.

The last six months has also seen Pendragon reduce its debts by just under £40m and secure financing to 2012. "We've stabilised everything and now it is about watching the market and making sure any upturn manifests itself in improved profits," Mr Finn said.