Derek Pain: Motor industry moves into a faster lane hesitant market

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The Independent Online
Investing in out-of-favour activities is often a sound, long-term exercise. Although, after a particularly tortuous time, the car industry is showing signs of recovery, the stock market seems far from convinced the worst is over

Investing in out-of-favour activities is often a sound, long-term exercise. Although, after a particularly tortuous time, the car industry is showing signs of recovery, the stock market seems far from convinced the worst is over.

Consequently, the shares of the nation's quoted motor dealers are, on traditional investment yardsticks, looking remarkably cheap. Not surprisingly, so are some of the back-up companies.

Private & Commercial Finance, providing funds for the hire purchase of second- hand cars, is one. The little HP group, with a capitalisation of only £6.7m, is expected to produce profits this year of £1.25m. The AIM-traded shares are, therefore, selling on 7.7 times prospective earnings. The historic dividend yield is around 4.5 per cent.

P&C appears to have hit on a formula which although not, of course, risk-free should provide it with an increasingly rewarding future. Last year profits nearly tripled to £611,000, and John Beddoe, an analyst at stockbroker Seymour Pierce, believes this year's £1.25m figure could be followed by £2.5m. The group, created seven years ago, arrived on AIM in 1998. Its shares have been as high as 90.5p; they are now 45.5p.

Until last year's lift-off there was little evidence it could stand out from the crowd. Indeed after producing profits of £411,000 in 1998, P&C went into reverse with a dismal £233,000 out-turn.

But the low point provided a platform for growth. Two takeover bids last year doubled its size. But they did not come until the final quarter and made only a modest impression on the £611,000 produced. Indeed the figure was struck after accommodating the costs of the takeovers and the integration of the businesses.

TMV Finance and United Motor Finance were the two companies acquired. TMV, by far the largest, cost £2.75m; the outlay on UMF was £1.2m. A mixture of cash and shares financed both deals with the group raising nearly £3m through a share placing and open offer at 63p a time. P&C had been on the lookout for acquisitions throughout its short quoted life. Then, as is so often the case, two came along quickly. It is still seeking takeovers, hoping to increase its already considerable power at what is the lower level of the car retailing market.

In the second-gear side of motor finance there is still considerable fragmentation, providing opportunities for P&C. The more upmarket end of the business is dominated by the big banks although consolidation among their HP offshoots should offer additional growth possibilities for the smaller fry.

TMV has increased P&C's fascination with what amounts to a more hands-off approach to providing second-hand car finance ­ operating through local agents. Chief executive Tony Nelson sees the group using more and more commission-earning agents who, he says, "help insulate the company from the ebb and flow of the motor trade".

P&C is also developing a leasing side, which appears to be making steady progress; it represents less than a third of the group's operations. The heady growth prospects are not entirely dominated by the possibility of trading growth. Mr Nelson and his team are working on plans for securitising its £50m loan book. Such a move should save some £500,000 a year.

With the directors owning around 30 per cent of the capital, P&C is by no means takeover-proof. With its improving network it could well fall victim to the industry consolidation. I would not be surprised if the hunter became the hunted. But any bid, I believe, would have to be comfortably above 100p a share to stand much chance.

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