Companies: EMH    HRO    INCH    LOOK    PDG    VDY   

In the words of the Chinese curse, these are interesting times for Britain’s car dealers. Reports of a seven per cent year-on-year fall in UK new car sales in the key March quarter come with predictions from the Society of Motor Manufacturers & Traders of a 3.5 per cent full-year slide to 2.48 million vehicles.

The collapse of MG Rover and the financial crisis at General Motors, parent of Vauxhall, are also focusing attention on the dealers. The City expects profits growth to slow, but is beginning to detect who will emerge stronger from today’s challenges.

An uncertain background
‘Business is tough,’ concedes Ken Spurgeon, who heads Manchester-based Lookers, though Lookers has kept its own new car sales fall to only 1.6 per cent while the manufacturers it represents have sustained an overall drop of 6.6 per cent. Others agree, while stressing that the latest sales figures compare with the second strongest year ever.

Against this uncertain background, the stronger dealers are keen to increase their share of second-hand car sales, where net margins can be appreciably higher than the four per cent achieved on new cars. They are also out to boost after-sales and spare parts services, which, says Spurgeon, can double the net new car margin, and premium cars, where margins nearer 12 per cent are the order of the day and purchase finance can increase that further to 15 per cent.

Block exemption boost?
Companies are also on the look-out for other dealers to buy, or be bought by, following October 2003’s change in the ‘block exemption’ rules, which has allowed dealers to buy other dealers without needing permission from the manufacturers whose franchises they hold. When the US rules changed in this way a few years ago, dealers’ margins eventually doubled.     

Market leader Pendragon, which had presciently cut its Rover franchises from 21 to eight (out of a group total of 250) sees the present debacle as marginal. Pendragon, which nearly doubled its size last year by taking over CD Bramall and increased pre-tax profits 50 per cent to £65 million on £3.3 billion turnover, is owed £600,000 on Rover stock.

Lookers, which increased pre-tax profits 89 per cent to £26.5 million in 2004 on £1.1 billion turnover, cutting gearing to 67 per cent, wants to expand further abroad (possibly into Poland) and has made a £2.8 million Rover provision. The company reckons only £500,000 on bonuses and warranty claims will be totally irrecoverable and it will make £350,000 on selling its Rover outlet in Coleraine.

Spurgeon expects after-sale services and parts to generate half Lookers’ gross profit this year, following the acquisition of FPS, a thriving parts distributor. He sees used cars contributing 15 per cent and his volume target is to move them from half to 66 per cent of the total, while, on the premium side, Lookers will develop sales of Toyota’s Lexus luxury models, for which it so far has two sites.

Safety in luxury
Luxury is the theme at European Motor Holdings, seen as a potential bid target, which boosted annual profits 79 per cent to £30 million, including a hefty VAT refund and other exceptionals. European’s boss, Richard Palmer, who says it had two ‘non-core’ Rover franchises and £600,000 of Rover stocks and debtors, points out that Audis, BMWs, Jaguars and other premium cars have upped their market share from five per cent to 20 per cent in ten years and is bullish about new models, such as the Audi A6 Estate and the Range Rover Sport.

Reg Vardy, which made a flat interim £24.2 million pre-tax on £850 million turnover, has only three Rover franchises and £600,000 outstanding. More exposed is Caffyns, which has been buying Volkswagen dealerships in the South of England and made a depressed first half £1.8 million pre-tax on £78 million turnover, with £3.6 million Rover stocks and warranties.

With HR Owen, the market’s concern has been with how far it can maintain recent expansion, with a disposal programme seen as under way.
Meanwhile, Far East focused Inchcape, which made £172 million pre-tax last year on £4 billion turnover, has been snapping up Mercedes Benz dealerships in the North of England, but is assessed more for its overseas prospects. Dealers with exposure to Vauxhall (Lookers has 14 franchises) do not believe President Bush will allow General Motors to go to the wall. Time will tell.

Our verdict
In terms of strategy and prospects, Lookers at 321p looks well placed over the long term, with Pendragon at 290p far from friendless. European Motor Holdings has potential bid spice at 227p and Inchcape’s eastern exposure should count in its favour at £19.22.