Rocky road ahead for dealers as share prices finally react to badly hit retail market

The current depressed retail outlook which is affecting the motor retail sector finally hit home within the prices of the listed motor retailers

during July. There were two main catalysts that prompted the price falls.

The first was the raising of concerns over Inchcape’s prospects as a result of a perceived weakness in Singapore and Australia, two of the company’s core territories. This prompted an eight per cent drop in the share price, effectively giving back the gains made over the past two months.

These factors have limited impact on the other UK listed stocks given their majority (or total) focus on the domestic market. However, the recent sentiment that Inchcape stood to benefit from the fast growth in the rest of the world while the UK takes its time to emerge from recession has certainly been shaken.

Closer to home, Vertu issued a trading statement ahead of its AGM. This statement placed into the public domain the situation car dealers have been facing since the end of the first quarter with the ‘fragility of UK consumer demand’ producing downward pressures on both new and used car markets. This saw the Vertu share price fall 15 per cent as the brokers re-priced their assessments of current-year profitability and the effect that weak consumer demand has on their volume-focused sales model.

‘July looks to have set the tone for the remainder of 2011’

The Pendragon share price dropped nearly 30 per cent in July. Unlike Vertu and Inchcape the Pendragon price had not enjoyed a boost in June so the current price is approaching the 52-week low. The drop comes from the announcement that the company is to tackle its debt position through a rights issue to existing shareholders.

While the introduction of capital funds to reduce the debt burden will strengthen Pendragon’s balance sheet the effective price of 10p has naturally depressed an already falling share valuation. On the positive side it will remove the uncertainty over banking negotiations and leave the directors free to concentrate on improving business performance during the remainder of 2011.

As expected, Lookers produced an immediate half-year trading update to quell some of the rumours as to the reasons Jack Petchey and his consortium downgraded their offer for the company before negotiations were terminated. The statement reassured investors that

trading was ‘very close to the record first-half performance of 2010’ and that the matters uncovered during the due diligence which led to the price revision were property and pensions related. Aside from the drop-off in price following the termination of sale negotiations, the price has remained relatively static with the strong aftersales focus of the business again mitigating some of the retail risks felt by other shares.

Cambria and HR Owen both saw share price falls on the back of the general concern over the retail outlook. July looks to have set the tone for the remainder of 2011 with each retailer looking to convince the market their business model is holding up well in the face of a depressed retail market. There will be potential opportunities – but significant bid activity may have to wait until the markets show signs of improvement.