The Private Investor: 'Macho action on forecourts is revving up share prices'

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The Independent Online

My worst fears are justified. That nasty clunk under the car bonnet means it's time for a new (or newer) car. It is not only the money. I just know I won't do a good deal. Fortunately, I think I have spotted a way to alleviate the pain, by hedging in the form of a mini-portfolio of motor-dealer shares.

My worst fears are justified. That nasty clunk under the car bonnet means it's time for a new (or newer) car. It is not only the money. I just know I won't do a good deal. Fortunately, I think I have spotted a way to alleviate the pain, by hedging in the form of a mini-portfolio of motor-dealer shares.

Reg Vardy's shockingly good results last week gave me the idea. But the seed had already been planted by Pendragon's profit warning back in June. "As a result of further strong trading", went a rare statement, results were "likely to be ahead of the current market expectation".

Along with house sales, cars consistently refuse to please the pessimists. For years, new car sales have held at more than two million units. Last year was a record at 2.56 million. This year, warned the Society of Motor Manufacturers and Traders, there was was bound be a fall. Not yet. Despite tight consumers' budgets, ghastly falls in savings and pensions, the Iraqi war and so on, sales are level with those of 2002. And the booming used car business is unmonitored.

Macho things are going on, revving up share prices. Bigger players in this fragmented industry have been taking out the competition. Last year, there were four major acquisitions, two quoted. CD Bramall bought Quicks, and the US major, United Auto Group, excited hopes of more cross-Atlantic forays when it picked up Sytner, as US dealers are more expensive than British.

Two banks, Royal Bank of Scotland and Lloyds TSB, bought Dixons and Dutton-Forshaw, and could go for more. There is a lot of strategic positioning. Behind all this, are changes in the rules to free car distribution from manufacturer control.

All that media fuss about "Rip-Off Britain" and the scandalous gap between low European and high UK car prices got government action. The new legislation will increase competition in new car sales, service and repair. The European Union wants pan-European pricing, although our prices are going down and theirs up.

From this October, dealers are free to expand through acquisitions in franchises they already own. The ramifications are considerable and lots more corporate action is forecast. But the strongest of the dealers can give a spurt to profits with add-ons from among the unquoted small fry. Some of this is already in share prices. But the view from motor country at the Birmingham broker Arden Partners is that there is more value to go for.

Top picks are the potential predators: Vardy, Pendragon and CD Bramall. Inchcape I like, too, with £17m cash and a Warburg forecast of 108p earnings per share (EPS) for this year. Its business is four-fifths international. The word is that Inchcape has been checking out other forecourts.

Among the most successful in the UK is Vardy, with a franchise based mainly in volume brands and a big second-hand trade. Scope exists, in Arden's book, for Vardy to increase its 78 dealerships to 100. Pendragon is among the largest UK retailers. It has picked up 29.99 per cent of a small quoted dealer, Ryland, which could be interesting because Ryland's management is attempting a buy-out.

Up-market specialisation makes European Motor Holdings a target because of consumers' shift to premium marques. It runs smoothly, has cash and a generous dividend. The broker Peel Hunt forecasts EPS 15.1p and, at 158p, an attractive yield from an 8p dividend. The top marque dealer HR Owen has orders for 600 new Bentleys, but it also has gearing of 131 per cent, so perhaps not the most tempting victim. Tiny Wm Jacks is already being roughed up in the forecourt war, but has a controlling shareholder to protect it.

Lookers has upped the class of its act, yet is still listed in the victim column. Gearing is back to 30 per cent. There is a nice little yield, and the broker WH Ireland is forecasting 2003 pre-tax profits of £14.1m, EPS of 29p, which at 224p gives a very undemanding 7.7 PER rating. The giant US financier GE Capital has a near-30 per cent stake, but by accident, not strategy. That could make it easier to snap them up.

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