JPMorgan upgrades Pendragon, says the worst is probably over

JPMorgan Cazenove upgraded car dealership Pendragon to 'neutral' from 'underweight' on Wednesday following its first-half results a day earlier, lifting the price target to 23p from 19p, citing the relative improvement in trading in the second quarter and stabilising industry outlook.

In particular, JPM reckons a near-flat outlook for second-half new car sales should help both new and used margins, with profit before tax operationally geared to this improvement.

It upgraded its pre-tax profit forecast by 7.6% for FY18 to £54.9m, mainly due to UK motor, but said it remains 10-15% below consensus.

Pendragon posted a 41% drop in first-half pre-tax profit on Tuesday to £28.4m versus full-year consensus of around £62m, while continuing pre-tax profit fell 46%, mainly on the back of weaker UK Motor trading and £2.4m higher interest costs. JPM said the improving UK new car trend is of note, with first-half like-for-like gross profit down 6% versus a 17.6% drop in the first quarter.

"The outlook appears to be beginning to improve, due in part to the weakening comparatives - £48.5m of profit before tax in H1 2017 versus £11.9m in H2. While significant risk remains, we expect the worst of the market conditions have passed, such that Pendragon's valuation may begin to look increasingly favourable."

At 1030 BST, the shares were up 1.3% to 24.30p.