Feelgood factor on the forecourts
Sunday 14 April 1996
The likely upside is illustrated in the case of Dagenham, a group of Ford dealerships heavily concentrated within the M25. The group's shares jumped sharply after its recent results. At pounds 5.1m, profits were in line with expectations but the excitement came largely because the group had managed to increase profits and margins in a difficult year.
But investors were also impressed by the implications of Ford's new regime on dealerships which, as Dagenham chairman David Philip noted happily, was now identical with the group's own strategy. In the old days Ford dealers were severely limited in the number of dealerships they could own and typically found that their fiercest competition came from a rival Ford dealer in the same area. Now the buzz words throughout the motor industry, not just at Ford, are "market areas". Dagenham, which used to be limited to eight dealerships will soon have 15, including main dealerships and satellites. These are concentrated within wealthy areas of London and the South- east and are turning the group into a series of local monopolies, though fierce competition from rival makes still remains.
If margins do grow, the effect could be startling because of the high operational and financial gearing of the motor trade. In practice analysts are forecasting profits of pounds 5.6m this year and pounds 6.3m next to drop the price-earnings multiple to around 10 on the 1997 figure. Those forecasts could prove conservative.
Investors may need to take a medium-term view because the new opportunities will bring short-term costs as the groups spend heavily upgrading facilities and enlarging networks.
Pendragon is a good example. Traditionally it has been strong in luxury cars which has enabled it to prosper in recent years when specialist cars have remained profitable while the volume-car market was in rough straits. Pendragon is now moving into the mass market. It is putting together a five-or-six dealer network to sell Volvos in south London which is expected to generate around pounds 60m of sales this year and, most recently, has been awarded the franchise for Fiat and Alfa Romeo for the entire area within the M25 - another example of the market area approach.
This is not expected to have any impact for two years as old dealerships expire and Pendragon spends up to pounds 15m putting together and stocking 15 new retail locations and three after-sales centres for Fiat in Greater London. But from 1998 every Fiat sold in the market-area will be supplied by Pendragon. Analysts have spec- ulated that sales could reach pounds 130m-pounds 140m, adding profits of pounds 2.5m plus to what the group is already making. By then pre-tax profits should have topped pounds 18m against the pounds 11.3m reported for 1995.
Vardy and Sanderson Bramall are management stories and, like Pendragon, long-time favourites of this column. Vardy has a wide range of specialist and volume marques and is ideally placed to benefit from the trend to bigger territories. It controls Nissan sales in Leeds and Renault in Sheffield. But it also has a particular strength in used cars, where margins are higher, and, most recently, has been successfully building an expanding chain of stand-alone used-car sites under the MotorZone banner. On forecasts of profits reaching pounds 16m plus for 1996-97 a prospective p/e of 12.5 looks undemanding.
Sanderson Bramall (SB), led by Tony Bramall, has seen a spectacular build- up in the last five years as a spate of well-judged acquisitions and organic growth has multiplied sales from pounds 72m to pounds 517m and profits from pounds 1.5m to pounds 9.3m. SB recently took control of its previously minority-owned Thrifty Car rental business and plans to build the chain from 68 to around 95 outlets over the next few years. Thrifty makes around a quarter of group profits. Tim Richmond, motor analyst at Albert E Sharp, expects profits to reach pounds 11.25m this year and pounds 12.5m in the next to reduce the p/e to 10.4 and rates the shares a strong buy.
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