THE INVESTMENT COLUMN: Quality road for Pendragon

Sales of top-of-the-range cars in the UK rose 30 per cent last year, dwarfing the mere 1.8 per cent increase for the market in general. That was good news for dealerships like Pendragon, which specialise in prestige marques rather than volume cars. Pre-tax profits were up 18 per cent to pounds 11.32m, due largely to another rise in sales of cars like BMW, Jaguar and Land Rover.

With luxury manufacturers planning to launch new and cheaper models this year, including Jaguar's E-Type successor, there should be enough to tempt consumers onto the forecourt. And Pendragon's ability to outperform the market - its sales of EU-made luxury vehicles rose 32 per cent last year - means carmakers will be willing to award it new franchises. Pendragon invested pounds 8.6m in new businesses last year and is opening six new Volvo dealerships in South London. Increasingly manufacturers are allowing dealerships to operate in bigger territories, which means firms such as Pendragon get greater economies of scale.

After the success of its first Harley Davidson motorcycle franchise, Pendragon has opened a second showroom, which the company said was making profits. And its contract hire business achieved a 41 per cent rise in operating profit to pounds 5.6m.

Industry figures for January suggest that luxury sales for some manufacturers are falling, although this probably has more to do with product change- overs than a fall in the market. Pendragon believes the up-market sector will continue to grow.

Against that backdrop, analysts' profit forecasts for 1996 are between pounds 13.2m and pounds 13.5m. On a forward PE ratio of 13 at 287p, up 2p yesterday, the rating is not demanding for a quality company.