Pendragon (PDG) 23.65p

Gain to date: 46%

We highlighted automotive retailer Pendragon’s (PDG) deep value appeal at 16.2p on 30 March 2023 with the shares weak after shareholder Hedin withdrew a takeover offer. We acknowledged the business faced near-term economic headwinds, but argued the downbeat outlook was more than priced in on a single digit multiple of forecast earnings.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

The Nottingham-based car retailer’s shares motored higher after the company announced a deal on 18 September that can only be described as a takeover with a twist. Pendragon is selling its low margin UK motor retail and leasing businesses to North American car retailer Lithia (LAD:NYSE) for £250 million.

Following the deal, Pendragon will remain listed and be renamed Pinewood Technologies, in which Lithia will make a £30 million subscription for a 16.6% stake. Crucially, Lithia is taking on Pendragon’s debt and pension liabilities, which will leave the remaining company with a clean slate and sharp focus on Pinewood, the cloud-based dealer management software business within Pendragon which boasts compelling growth prospects.

The transaction includes a strategic partnership between the two companies focused on the rollout of Pinewood to Lithia’s existing 50 UK sites and the creation of a joint venture to accelerate Pinewood’s entry into a North American dealer management software market worth more than £2.6 billion per year.

WHAT SHOULD INVESTORS DO NOW?

Pendragon shareholders should receive aggregate shareholder value of 27.4p per share from this deal, a 48% premium to the closing price on 15 September, which includes a 16.5p per share or £240 million cash dividend from the disposal, a retained 83.3% ownership in Pinewood worth 10.3p per share and 0.6p per share relating to an indirect interest in the North American joint venture with Lithia.

We think it is worth sticking with the shares to see how things play out as a software as a service business with an accelerated growth plan led by Pendragon’s current CEO Bill Berman. Around 90% of Pinewood’s revenue is recurring and EBITDA margins are attractive at circa 60%.

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