Under-The-Radar Spin-Off a Small-Cap UK SaaS Business (Pendragon - LSE:PDG)
Note as of 02/02/2024: I’ve been following Pendragon’s developments with Lithia Motors and other strategics since mid-September 2023. I was also fortunate enough to present my views at a stock pitch competition held in early November by Alta Fox Capital and the Harvard Financial Analysts Club. At the time, Pendragon was trading at ~£0.31 / share, but following yesterday’s announcement of the completion of the disposal, stock has now traded up to ~£0.35 / share (around the same implied valuation that Lithia placed on the business) and is under a new name and ticker (Pinewood Technologies - LSE:PINE). Although the opportunity for a multiple re-rating has largely dissipated since then, the EBITDA expansion story is still attractive and there may be an attractive point of re-entry following completion of the spin-off.
Elevator Pitch / Summary:
Since 2022, Pendragon has been engaged by multiple strategic parties in relation to purchasing the entirety of their business. Management, the board, as well as various shareholder groups rejected approaches, citing the fact that the bids grossly undervalued the business, and that they believe the shares have consistently traded at a significant discount. This was up until September 2023, where Lithia Motors, a party that had previously made a bid for 100% of the business but was blocked by a competing shareholder group, made a proposal to purchase the dealership and leasing businesses of Pendragon, thereby leaving the dealership management systems (“DMS”) SaaS business—Pinewood Technologies—independent and publicly traded. The implied valuation of Pinewood immediately post-transaction sits at around ~9.0x LTM EBITDA at current share price levels, a substantial discount to DMS peers that have recently been acquired for multiples sitting in the mid-teens on average. This is despite the fact that Pinewood is a pioneer of DMS SaaS providers, commands a 20% market share in the UK, is integrated with 50+ OEMs, and is less susceptible to the high-switching costs that characterize DMS platforms as indicated through calls with dealerships and industry participants. Moreover, management’s plan to onboard an additional ~16,000 users by FY27 to reach an EBITDA figure of ~£27M is vastly underappreciated. In a scenario where the stock re-rates closer to DMS peers, and management achieves only half of this user growth (growing EBITDA by ~30% rather than their ~80% target) through FY27, IRRs >25% can be expected. My calls with management as well as industry participants indicate that Pinewood has suffered from a major conflict of interest from being associated with Pendragon in the first place, which has significantly held back the business’ customer acquisition strategy. Operating independent from Pendragon should result in higher growth for the business, with management being committed. To be conservative, estimate in my base case that Pinewood can generate £19.6M in EBITDA by FY27 and trade at a 15.0x multiple, representing an upside of ~160% and a ~27% IRR. Given the receipt of a dividend, the risk / reward of investing prior to transaction close is asymmetric sitting at 3.5x.
The Business:
Pendragon is the 2nd largest UK automotive dealership company, operating under 3 distinct business segments:
1. UK Motor
2. Fleet and Leasing
3. Software
UK Motor (~97.0% of Revenues): The 2nd largest automotive dealership group in the UK operating 145 dealerships. Pendragon generates revenue through selling new and used vehicles, alongside parts, servicing and repair activities (aftersales). Pendragon has 3 brands under which they conduct their UK Motor segment related activities:
Evans Halshaw (90 retail locations): Leading volume vehicle retailer in the UK holding franchises to retail and service for 10 brands (Ford, Vauxhall, Citroën, Renault, DS, Dacia, Peugeot, Nissan, Kia, Hyundai)
Stratstone (43 retail locations): Largest UK retailer for premium vehicles, holding franchises to retail and service for 11 brands (Aston Martin, MBW, BYD Auto, Ferrari, Genesis, Jaguar, Land Rover, Mercedez-Benz, MINI, Porsche, Smart)
CarStore (10 locations): Operates as an online marketplace—carstore.com—whereby customers can speak to advisers, purchase vehicles online, and have it delivered to them. Also runs CarStore centres providing the same services except in-person. It essentially is designed to have customers initially visit a CarStore centre to seek advice and guidance from advisers, and then purchase their vehicle online.
Fleet and Leasing (~2.3% of Revenues): Pendragon serves as a fleet and contract hire provider, where they primarily provide a supply of used vehicles for customers across all business sectors with varying fleet sizes.
Software (~0.7% of Revenues): Pendragon provides software under their Pinewood platform to help dealerships operate the entirety of their business all in one place (essentially an ERP software)—known as DMS software. By initially trying to create an in-house DMS solution for themselves, Pendragon developed a robust platform that provides dealerships with solutions across all levels, this includes:
Sales – Inventory management; CRM; parts-exchange; sell-your-car capability; customer satisfaction; contract plans; etc.
Aftersales – Warranty; workshop management; customer retention; parts storage and picking; etc.
Apps & Services – Micro-services (payment, financing, and insurance), business KPIs; etc.
Other – Data security; language and currency capability; accounting and compliance; stock ordering; shipping and distribution; etc.
Pinewood is fully integrated, and similar to other DMS platforms, is an essential tool for dealerships. This is the business that we are focused on today.
Pinewood History:
Pendragon was originally part of Williams Plc (a former major UK conglomerate) until it was de-merged in 1989. At the time, it operated 19 dealerships as well as a small leasing business. Pinewood itself was founded in 1981, but was later acquired by Pendragon in 1998 for ~£2M in cash, which based on 1998 financials, represented a ~2.5x multiple on revenue, and an ~18.3x multiple on operating profit . Subsequently, Pinewood was renamed from “Pinewood Computer Holdings” to “Pinewood Technologies,” and Paul Hopkinson was appointed as Managing Director of the group (and currently still serves as such).
Pinewood’s business activities initially encompassed DMS, as well as the sale of computer systems, telecom systems, and associated support services. Following Pendragon’s acquisition of Evans Halshaw in 2000, Pinewood absorbed the Vehicle Management Services division of Evans Halshaw, at which point it appears the company solely began focusing on fleshing out the DMS portion of Pinewood. In 2002, Pinewood completed the development of their new DMS platform, Pinnacle. Upon completion, Pinnacle was Windows-based and designed as being easy to operate, which is largely the same value proposition that continues to define the DMS platform today, it was also deployed in 2 of Pendragon’s dealerships.
By the end of 2004, the number of dealerships using Pinewood increased to 24, then 128 by 2005. Pinewood is now the 2nd largest DMS provider in the UK, commanding a ~20% market share.
A major focus over the years for Pinewood has been diversifying its revenue streams to increase the proportion of revenue from external customers as opposed to Pendragon dealerships. In 2007, revenue from Pendragon dealerships as a percentage of total Pinewood revenue was ~74%, this same figure has been diluted to ~25% as of 2022. Despite the decline, I believe Pinewood could have done a much better job in its customer acquisition strategy over the years yet was unable to do so given a conflict of interest being associated with Pendragon itself (I’ll dive into this in Thesis II). Upon an initial glance at the business’s financials spanning back til 2005, revenue does not appear to be as recurring as the company claims (~90% recurring revenues), but the reason for this is because of the susceptibility that Pinewood has had to the overall Pendragon dealership business—revenue for Pinewood declined ~27% from 2007 to 2010, with the reason being that Pendragon dealerships comprised ~67% of their total revenues on average during this period, and the business closed 98 of their dealerships through the financial crisis.
Why This Opportunity Exists Today:
There’s a couple of reasons:
DMS is an under the radar industry—there are no publicly listed pure-play DMS providers, and the industry itself is niche; Pendragon estimates that the DMS market in the UK is >£100M.
Pinewood is a vastly overlooked part of the overall Pendragon business; investors primarily recognize Pendragon as being a dealership business
Pinewood has represented, on average, <1% of total revenues and ~10% of operating profit since 2016
Pendragon’s stock is illiquid and will become even moreso post-transaction as Pinewood becomes independently traded
Pendragon currently has a market cap of ~£450M, with ~47% of shares being held by >5% beneficial owners, and ~2% by executives and directors
Pendragon has limited sell-side coverage (Jefferies, Zeus Capital, Berenberg)
Ultimately, the reason for this opportunity is Pendragon’s business sale agreement with Lithia, which will leave behind the hidden gem of the business. To fully understand how this arrangement came to be, we have to go back to 2019…
Timeline of Events:
January 2019 – Activist investor Teleios Capital Partners increases its stake in Pendragon from ~4% to ~21.3% to put in place a new CEO to replace Trevor Finn, who announced in December 2018 that he would retire following Q1 2019
January 2021 – Former Pendragon CEO Trevor Finn is appointed as a non-executive director of Hedin Group following the group’s acquisition of Ford Sweden
November 2021 – Hedin Group builds a stake in Pendragon, owning 26.2% of the stock following former largest shareholder Teleios’s exit; speculation arises regarding a potential takeover bid
March 2022 – Revealed that Hedin Group tabled a secret £0.28 / share offer for Pendragon weeks prior; Pendragon board rejected the approach
July 2022 – Lithia Motors makes a £0.29 / share offer for Pendragon; this required 75% shareholder approval, and since Hedin owned >25%, they were able to block the bid
September 2022 – Hedin Group makes an unsolicited £0.29 / share offer for Pendragon and states that they will not consider or accept any other offers for its current shareholding in Pendragon given their belief of the long-term potential of the business
December 2022 – Hedin withdraws Sept. 2022 offer citing that the economic outlook remains challenging
September 18, 2023 – Pendragon agrees to the sale of its UK motor business, leasing business, and a 16.67% interest in Pinewood (RemainCo) for £280 million to Lithia Motors; Lithia effectively structure themselves into a deal that allows them to purchase the dealership and leasing businesses of Pendragon, while avoiding blockage from Hedin given that under this arrangement, they only required 50% approval
September 20, 2023 – Pendragon receives another £0.28 / share unsolicited bid from Hedin and Penske to jointly acquire the business; offer is rejected by the board
September 22, 2023 – Pendragon receives a £0.32 / share unsolicited bid from Hedin and Penske to jointly acquire the business
September 26, 2023 – Pendragon receives a £0.32 / share unsolicited bid from AutoNation
October 2, 2023 – Lithia offers a 42% increase in their previous offer for Pendragon, for a total cash consideration of £397 and an implied total initial value of the business of ~£0.354 / share
October 4, 2023 – Hedin and Penske announce that they will no longer make an offer for Pendragon
October 17, 2023 – AutoNation announces that they will no longer make an offer for Pendragon
October 25, 2023 – Lithia transaction approved by Shareholders—1,023,457,643 (98.9%) votes for, 11,219,596 (1.1%) votes against
December 28, 2023 – Pendragon received approval from the FCA to undertake the arrangement with Lithia
(NEW) February 1, 2024 – Disposal completed
Essentially, Lithia intended to purchase Pendragon in its entirety, but following the rejection of their initial bid, they structured themselves out of Hedin’s blockage through a divestiture agreement that will effectively serve as a spin-off of Pinewood—the DMS SaaS business. Lithia’s offer now represents total cash consideration of £397M for Pendragon’s dealership and leasing businesses, as well as a 16.3% interest in Pinewood.
As a result of Lithia’s bid, investors in Pendragon will now receive:
£0.245 in cash through a dividend
A retained 83.3% ownership in Pinewood (initially valued at £0.103 as per Lithia’s offer)
An indirect interest in the NA JV between Pinewood and Lithia to roll out the Pinewood DMS to dealerships in NA
The DMS Industry:
Despite DMS providers selling towards a cyclical end market, the majority of platform providers have tailored their solutions towards providing a more comprehensive service which have become crucial for dealerships to operate their businesses once integrated. DMS is much less exposed to the cyclicality of consumer auto demand.
Globally, the DMS market is highly fragmented, and management estimates it to be worth >£2.5B. In Europe there are over 50 DMS providers alone. Looking at the UK in particular, the industry is dominated by 3 main players:
Keyloop (~60% UK market share)
Pinewood (~20% UK market share)
Reynolds & Reynolds (~10% UK market share)
A notable and fairly recent event that took place in the industry was the sale of CDK International (now known as Keyloop) by CDK to Francisco Partners in 2021. Prior to this sale, CDK was the largest DMS player globally, but was separated into 2 businesses:
CDK Global, which encompasses its DMS platform serving North America
Keyloop, the previous DMS business of Keyloop that serves customers in EMEA
The subsequent purchase of the remainder of CDK’s business by Brookfield in 2022 made it so that Pendragon was one of the only few major DMS competitors to be publicly listed (CDK, Keyloop, Reynolds, DealerTrack, and Tekion are all privately held).
There are a couple of key industry characteristics that I would like to highlight:
Pinewood essentially serves as the value player in the UK market, and is recognized for its ease-of-use over competitors, while Keyloop has more integrations with third parties and is priced higher
Contract terms for DMS software arrangements typically span 5 years and are annually renewable thereafter
Dealers do not change their DMS providers easily given the significant effort required for integration; the average period of change will be roughly 7 – 10 years
Pricing is done primarily in 2 ways; an increasing number of DMS providers have recently begun switching towards a concurrent user model (Pinewood included) over named users
Before I dive into the theses, I want to go through some of the characteristics of Pinewood that I believe make it compelling to own from a business quality perspective. Outside of being a and that separate it from many other DMS platforms.
OEM Relationships - Pinewood has operated for over 2 years as one of the leading DMS platforms to vehicle retailers in the UK. Over these 25 years, the company has developed significant relationships with ~50 OEMs that it leverages on its platform. This puts Pinewood in a very nice position, with more OEM partnerships than some major DMS players such as Reynolds & Reynolds (partnered with 40 OEMs). Although OEM relationships are not exclusive to any DMS software provider, there’s a couple reasons as to why this is important for DMS businesses as I’ve picked up on through calls with industry participants:
Customer Acquisition – OEMs play a role in suggesting DMS platforms to dealerships that sell their vehicles whenever a DMS is integrated with them, these suggestions are purely on a recommendation basis (not mandated), but they go a long way in setting guidance for which DMS provider a dealership should adopt. For example, Toyota recommends Toyota dealerships to use Keyloop given the DMS platform’s affiliation with them.
Product Offering – Pinewood’s platforms is able to integrate everything into one place, streamline processes, and is easy to use which industry participants note is heavily favourable. The platform has a back-end system within its software that allows it to communicate with OEM partners and streamline tasks such as bringing vehicles into stock, distributing it to advertising networks, and for specifications and scheduling. Industry participants express that Keyloop and other competitors are more archaic when it comes to this factor.
Incentives for Dealerships - Dealerships also prefer DMS systems that are integrated with OEMs since OEMs pay bonuses to dealers on data collection, it is fundamental to have this available.
Heightened Ease of Use Over Competitors – Alongside having the aforementioned capability of providing 2 interfaces (a front and back-end) which enables dealerships to operate every area of their business in a single place, customers note that Pinewood is much easier to use and integrate than competitors. This is increasingly important for dealerships given the significant implementation cost and efforts that they incur in order to integrate DMS software into their business; the process for this takes months, and heavily impacts the ability of a dealership to operate smoothly. Channel checks indicate that 75% of Pinewood’s functionality can be picked intuitively, which makes it especially helpful when onboarding and training new staff in automotive space, where turnover can be as much as 30% in certain groups.
One VP of Sales for Keyloop notes that the implementation time (including integration and staff training) for Keyloop typically can be no shorter than 3 months from signing the contract to going live, which typically involves physical down-time required for about 2-3 days that completely shuts down the ability of a dealership to operate. Integration for Pinewood is much shorter, spanning around a month to a month and a half.
Thesis I: Significant Market Mispricing of Pinewood
Under the initial terms of Lithia’s agreement with Pendragon (the first one back in September 2023. prior to a revised bid) involved the receipt of a £0.165 cash dividend. In the release, Lithia stated that they initially valued Pinewood at £0.103 / share, which implied a 14.3x multiple on FY22 EBITDA. But because the share price of Pendragon jumped ~£0.245 on announcement, the market ascribed ~£0.08 / share to Pinewood, which implied only a 11.0x multiple (Figure 1). The valuation discrepancy between Lithia and public market investors became even more exasperated when Lithia revised their bid upwards by 42%; investors would now receive a cash dividend of £0.245, and the stock price jumped to ~£0.32 / share, implying a ~9.7x multiple on FY22 EBITDA.
A multiple below 10x for a pure-play highly profitable SaaS business with >90% ARR seems cheap, especially considering management’s growth targets for users. Evidently, there is a re-rating opportunity for Pinewood to trade more in line with DMS peers, which should be achieved once the business begins to publish dedicated financial statements and increases transparency to investors. Given that industry consolidation and purchases by sponsors have taken out its closest peers, I find that on a precedents transactions basis, Pinewood should trade around ~15.0x EBITDA (Figure 3)—a re-rate implies ~150% upside.
Figure 1: Implied Pinewood Valuation Under Initial Lithia Terms
Figure 2: Implied Pinewood Valuation Under Revised Lithia Terms
Figure 3: Precedents
I also believe that management’s growth prospects for Pinewood aren’t being recognized enough. Management is currently targeting the addition of ~16,000 users by FY27 to reach a total of ~48,000, this is excluding an additional targeted ~17,500 users in the US brought by their JV with Lithia. The basis behind this incremental 16,000 users include:
The rollout of Pinewood across Lithia’s existing 50 UK sites, which are expected to add ~2,500 users by FY25
Deployment of Pinewood in Japan (which began in 2023)
Global expansion across Western Europe, the Nordics, Asia Pacific, the Middle East, and South Africa (aided by Lithia)
To illustrate how underappreciated this is, I’ve included in my model a bull, base, and bear case that vary in the FY27 total user and EBITDA figures that management achieves (Figure 4). To be ultra-conservative, I’ve assumed that management achieves only about half of their user growth targets for FY27 as my base case, adding only 8,000 users, and growing EBITDA by ~30% (as opposed to adding 15,200 users, and growing EBITDA by 80%). My bull case is based on management’s plan, and my bear case models out a ~10% decline in users, with EBITDA being cut by 1/3rd. Despite being nearly half of management’s targets, IRRs ~25% can still be observed in my base case. Even under my bear case assumptions you’re still not losing money which provides ample risk / reward. Although these returns are contingent on the stock trading at 15.0x by FY27, I believe a 4-year time frame provides a sufficient amount of time for investors to recognize Pinewood (more sensitivities included in valuation and model).
Figure 4: High-Level Scenario Analysis
Thesis II: Autonomy Extinguishes Underlying Conflict of Interest and Enhances Risk Profile
My conversation with management indicates that Pinewood has historically suffered from a major conflict of interest from being associated with Pendragon that has heavily impacted the business’s customer acquisition strategy—this has also been heavily reiterated from calls with industry participants, with one former employee noting that some dealerships would never consider Pinewood due to it being owned by Pendragon. The reason for this is simply due to the fact that competitors do not want to purchase a product owned by a competitor, as such, most of Pinewood’s customers have been smaller independent retailers alongside Pendragon owned dealerships. Accordingly, Pinewood has had a much easier time being adopted in foreign markets, where users have grown at a ~20% CAGR since 2020.
On top of being able to serve an additional 2,500 new users from Lithia post-transaction, Pinewood should have a much easier time acquiring customers in the UK; dealerships in the UK are well-aware of Pinewood but have shunned away from adopting the platform as a result of competition to Pendragon. Sentiment around the product is in line with what I have shared above, that it’s a great and easy to use product built by a major dealership operator who understands what is needed for dealerships in DMS software—Pinewood’s potential is heavily hindered by its relationship with Pendragon.
Despite this consideration, Pinewood seems to have done a decent job at diversifying its clientele away from Pendragon dealerships, with revenue from Pendragon being diluted to ~25% from ~75% over the course of 2007 to 2022 and revenue from external customers more than doubling over that same period. The stock doesn’t screen to well when looking at revenue growth, which is especially crucial given its SaaS business model, but again, this is due to the susceptibility that Pinewood has had in the past from having a high proportion of its total revenue figures being attributable to Pendragon, which has closed over 200 locations since 2007. Considering that Pinewood will continue to serve Pendragon dealerships (~130) post-transaction, be implemented into Lithia’s UK dealerships (~40), and be able to appeal to other UK dealerships following the removal of this conflict of interest, revenue should inflect and become more stable.
It’s important to note that Pinewood is priced 10 – 15% less than Keyloop (based on calls). Although there is no indication that this has helped Pinewood grow its clientele (since clients primarily highlight its functionality and ease of use over its price), the business may have an easier time growing its user base moving forward given this characteristic, as well as given the fact that many automotive OEMs are exploring an agency model for their retail networks in the UK. Essentially what this means is that OEMs will be the primarily seller of vehicles to the consumer, controlling both the pricing and inventory. The dealer on the other hand facilitates the delivery of the car in exchange for a handling fee, acting as an “agent”. Although this does result in more cash flow predictability for dealerships, given that OEMs are now controlling and maintaining any new cars in stock, it also means that dealerships will have less control over margins and will have to move the needle in other ways. Pinewood can benefit given its lower pricing over competitors. Alternatively, I believe the business could also instill price increases (as CDK and Keyloop did post-acquisition by sponsors) with little to no pushback given the costs of switching DMS platforms. In either case I see Pinewood being able to benefit from current industry dynamics more than competitors.
As a pure play SaaS business, Pinewood will also no longer be impacted by underlying automotive demand that have previously impacted returns to shareholders. Dealerships will need to continue to use DMS software to operate their business regardless of market dynamics, which should insulate Pinewood from short-cycle automotive trends in the background. Pinewood cash flows have been less susceptible to the cyclicality of automotive demand, which should provide a more plateable risk profile moving forward. Tail risks to consumer automotive demand cycles have largely been the primary cause of slumps in Pendragon’s share price, but during these periods, Pinewood still grew and performed well. Take 2 previous instances as an example:
2018 – Demand for both new and used cars in the UK drops, Pendragon UK Motor revenue shrinks 4% and gross profit per user is impacted accordingly; Pinewood grows both revenues and underlying operating profit by ~7% and expands underlying operating profit margins by ~110 bps
2019 – Pendragon share price falls by ~29% after management lowers guidance, citing falling demand for new cars resulting in lower prices. UK Motor revenue falls by ~2%, while Pinewood grows both revenues and underlying operating profits by ~39% and ~15% respectively, and expands underlying operating profit margins by ~200 bps
One other thing, post-transaction, Lithia will assume all of Pendragon’s net debt and pension obligations, leaving Pinewood recapitalized with no debt, pension liabilities, or any related liabilities from the legacy Pendragon business, which have been among the main concern for the company in previous years. A clean slate on the Pinewood’s capital structure extinguishes these concerns, and allows the company to lever up for expansion purposes.
(Mini) Thesis III: New Management at the Wheels
This thesis is more or less a minor consideration, yet still something I find appealing as Pinewood moves forward as a RemainCo. Pinewood will be ran by a newly appointed management team with years of experience in the automotive and DMS space. Prior to his resignation, Pendragon was led by Trevor Finn for ~30 years, even preceding Pendragon’s de-merger from Williams Plc in 1989. Shareholders of Pendragon have complained over governance concerns and blamed Trevor for operational failures in the past:
2003 – Trevor was investigated for having his pension pot increased by 50% to £2M while cashing in options worth ~£1.5M. He Additionally took on a bonus of £262K which breached the UK regulator corporate governance code.
2004 – 2007 - Trevor leads value destructive acquisition strategy with trouble integrating the acquired businesses in the following years; nearly bankrupted the company in 08’; Trevor instead blamed rates
2011 – 2012 - Issuance of a highly discounted rights offering for debt-paydown purposes; 2/3rds of Pendragon investors voted against the remuneration report
2015 – 2019 - Trevor sells another 2M of stock in 2015; activist Teleios Capital advocated for his removal as CEO in 2019. He left the business with a 1.2% stake and joined as a director of Sweden’s Heden Group
Following Trevor’s resignment, Mark Herbert became the new CEO of Pendragon, but quit after 3 months without an explicit statement. There was some speculation online that this had to do with him, alongside other members of management disputing on how best to turn around the car business.
Bill Berman became the newly appointed CEO of Pendragon following all of this, and has taken promising steps in the right direction to relieve of its previous issues. This includes reducing pension obligations from £59m to £3m, managing the left-over inventory glut during the pandemic, and reducing the business’s dependency on traditional dealerships during the pandemic by building out the hybrid store model via Pendragon’s CarStore brand.
Valuation:
I valued Pinewood by applying a multiple on FY27 EBITDA, my entire model is attached for reference, but here is a look at my assumptions and explanations behind them:
Revenue:
To be conservative, I assumed that management’s achievement of an incremental 16,000 users from FY22 would be the bull case, achievement of half of this target would be the base case, and a decrease in total users by 9% (implying EBITDA is cut by 1/3rd) would be the bear case
Step-up in APRU of ~£35 / user each year from £800 assumed under the bull case; this is following management’s guidance of £45m in revenue by FY27
Historical average APRU of £800 assumed for base and bear case
EBITDA:
Historical average EBITDA margin of ~60% was used to project out EBITDA for both the entire projection period under the bull and bear case; this is also following management’s plan
Assumed that EBITDA would be cut by 1/3rd from FY22 levels by FY27 (reaching a 43% margin) under the bear case
My overall thoughts:
There’s substantial upside in Pinewood despite what I believe to be highly conservative assumptions being made under the base-case. Again, my base-case revenue projections represent achievement of only half of management’s user targets, and only around a third of both revenue and EBITDA targets.
Given the spin and receipt of a dividend, there’s 2 ways you could play an entry into this stock:
Scenario 1: Investing Post-Transaction Close
Investing in Pinewood at current implied share price levels would imply a ~140% upside and ~25% 5-year IRR under base-case assumptions.
The risk here is that the share price of Pendragon increases from the time being until transaction close, resulting in a higher implied share price for Pinewood. In this scenario, we see the implied share price of Pinewood rise no further than Lithia’s valuation of the business—£0.103 / share. Entering a position at this price would still yield a base case upside of ~65% and a 5-year IRR of ~13%
Risk / Reward:
Sensitivities:
Scenario 2: Investing Pre-Transaction Close
Investing in Pendragon at current share price levels would imply a ~43.9% upside and ~25% 5-year IRR under base-case assumptions. I assume that the transaction dividend will be received by H1 2024, with transaction close happening earlier in the year.
The worst case scenario under this entry would be that the agreement between Pendragon and Lithia falls through. However, in this scenario, I see it likely that the share price will revert to similar levels of the share price prior to the deal being announced (£0.28 / share). Its also likely that Hedin or other parties will continue to pursue a buyout of Pendragon if this occurs, reinforcing the R / R.
Risk / Reward:
Sensitivities:
Risks / Catalysts:
Risks:
Lithia deal terminated
A third party attempts a bear hug / places a higher bid resulting in the deal being delayed or not pursued
Catalysts:
Completion of disposal in Q1 2024
Reporting stand-alone financial statements to increase awareness of the investment opportunity in Pinewood; seems to be a very under-the-radar and overlooked opportunity
Disclaimer:
This article is intended for informational and educational purposes only and should not be construed as financial or investment advice.