Car dealer continues to speed ahead

By Graeme Dickson
Updated: 13:03 EDT, 9 February 2011

After a 2.5 per cent hike in VAT to 20 per cent, the last thing that I would normally suggest would be to look at a stock that sells big ticket items, but on this occasion, the downside looks to be overdone:

Pendragon (PDG) is a motor car dealer with dealerships under the brand names of Stratstone, Evans Halshaw and Chatfields with over 300 retail sites in the UK and California (USA), primarily selling high-volume cars such as Ford and Vauxhall, but also strong in luxury brands such as Maserati to Mercedes-Benz.

The shares have been on a downward trajectory over the last year, possibly because of the mounting debt (up to 30 June the net debt had ballooned from £317.7 million to £346.7 million).

Its market capitalisation of £150 million is pretty huge, albeit the net debt increased primarily down to new vehicle stock intake for product launches along with extra investment in property, plant and equipment.

The company is scheduled to release its preliminary earnings results on 23 February and if it can deliver on the earnings per share forecast of 2.53p a share, placing it on a projected price to earnings ratio of just over nine times, the stock will start to tick one of many boxes that the market is looking for.

An additional box that it must tick is to demonstrate that net debt has at least stabilised or reduced somewhat.

Financing the debt is costing the company about £24.4 million. If it can renegotiate its debt with the banks on more favourable terms, this could save the company an absolute fortune and add more to the earnings per share going forward as well as potentially making inroads to paying off part of the debt later down the line.

The forecast for 2011 is for earnings to swell to 3.39p a share, placing the company on a forward multiple of just 6.78.

Tuesday' 12.2 per cent share price hike came about on rumours that Pendragon was being eyed up by another car dealership, so perhaps the worst is over for loyal shareholders, who have suffered over the last 18 months relative to the success of rivals such as Inchcape.

Update

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 1.36p – keep holding for now as we await contract developments.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 37.5p. The company should issue a trading statement soon which will hopefully maintain investor interest in the stock.

Europa Oil & Gas (EOG) – suggested to buy at 30.25p, the shares closed yesterday at 38.25p. The stock has benefitted from a tip for another company, Aurelian Oil & Gas (AUL) in a well followed publication which is almost 10 times the size of Europa but has some shared interests in Romania. Continue to hold.

SocialGo (SGO) – suggested to buy at 3.55p, the shares have drifted to 3.475p. Keep holding for now and will briefly report about my meeting with the management next week.

EMED (EMED) – suggested to buy at 12.25p, the stock closed yesterday at 16.25p. The company is still waiting for approval from the Junta regarding the transfer of mineral rights, which seems to be dragging on. Continue to hold but keep the stop at 13p to ensure profits.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 5.25p. Continue to hold and await further developments from the company as it signs more customers to its VoltageMaster system.

Bango (BGO) – suggested to buy at 142.5p, the stock closed yesterday at 154.5p. Sit tight for now as we await further developments.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.725p. Having already suggested to sell one's investment stake out at 2.51p, investors should now be enjoying a 'free ride' for those that followed this course of action. Hold the balance for now.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 14p. Te company does not seem to put a foot wrong, having yesterday announcd further hedging on part of its production at a higher copper price. The company is pitching itself to a very affluent audience at the Indaba conference in South Africa and should hopefully benefit from Ambrian, its corporate broker, writing a positive research note after its visit to Weatherly's operations in Namibia.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 7.5p. The company is likely to announce a deal with a world-wide distributor for some of its wireless chips, which should act as a catalyst to break away from its 6-8.5p trading range. Continue to hold.

Renewable Holdings (REH) – tipped as a buy idea at 16.25p, it closed yesterday at 18.75p. The stock has at last woken up after investors finally digested the fact that Weiss Asset Management had upped its stake to 21.2 per cent. Continue to hold as the stock slowly grinds to a narrower discount to its Net Asset Value

Bowleven (BLVN) – tipped as a buy at 177.25p, the stock closed at 355.75p yesterday. Suggested six weeks ago to sell half after an initial 102.8 per cent gain, the balance should be retained as we await further progress from its Sapele-1 drilling campaign and the Etinde permit.

Tissue Regenix (TRX) – suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 11.5p. Keep holding as we await trial results from its NHS trials and further product developments.

The material for this report comes from Sharescope and Pendragon's website.

The writer does not hold any shares or derivatives in the above mentioned companies except EMED and Weatherly International.

Some clients of Optiva Securities may hold shares in the above named mentioned companies.