The Investment Column: Pendragon

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FORD'S RECENT pledge to reimburse customers if it cuts prices later in the year underlines how uncertain times are for Pendragon, the UK's largest car dealership.

The widespread expectation that manufacturers will be forced to bring down UK car prices in line with those on the European mainland has seen the used-car market crumble.

Pendragon has taken pre-emptive action, cutting used car prices, thereby destocking. That dented first-half profits.

Meanwhile, Ford, Pendragon's principal franchise, has continued its push into the UK dealer network by buying out half of Pendragon's Ford dealership assets. The cash from the deal will pay off debt incurred when Pendragon acquired the Evans Halshaw dealerships earlier this year.

The deal also fits with Pendragon's strategy of strengthening relationships with the largest multinational car manufacturers. The rationale is to exploit scale economies by centralising dealerships' back-office work and cutting the staff. But while Pendragon's Fiat franchise has already been plugged into the network, getting the rest of its forecourts on board will take some time.

Dresdner Kleinwort Benson expects pre-tax profits of pounds 23.9m and earnings of 27.5p per share, putting the shares on a forward p/e of just 7. Despite continuing uncertainties over car prices and the market's seasonality, the shares, at 188.5p, look cheap.