Martin Flanagan: Any scrap of good news is welcome for car dealers

Published on Tuesday 9 March 2010 20:17

MAJOR motor dealerships such as Lookers and Pendragon have returned to profitability in 2009 after a lossmaking 2008 that had been weighed down by the onset of recession and a plethora of expensive restructuring to deal with it.

And underlying finances in the industry also look a lot better, many companies having shored up balance sheets to help the transition from the gloom.

Lookers, for instance, tapped shareholders to cut its net debt by 70.5 million. That took the firm's key gearing ratio to a far healthier 49 per cent from a coupe-on-a-cliff 180 per cent in 2008.

Lookers said yesterday its return to the black means it is planning to resume dividends later this year. All good news – and hopefully another big motor dealer, Inchcape, will keep up the flow when it reports results today.

Meanwhile, the Society of Motor Manufacturers and Traders says new registrations in January and February this year are up 30 per cent on the same months of 2009. All well and good, and any recovery has to start somewhere.

But it is not unmitigatedly positive if you kick the tyres of the industry's prospects, at least short-term. Lookers and Pendragon (and almost certainly Inchcape today) believe 2010 will be testing.

Stabilisation of car sales is probably the best hope. Firstly, that sharp jump in new registrations in January and February is from a very low base. In the first couple of months of 2009 the sector was frozen on the recessionary forecourt.

This February's new car sales, while buoyant on a year ago, are also down 1.3 per cent on February 2008 to lend some perspective.

And, crucially, the government's car scrappage scheme, a huge boost for the beleaguered car industry since last spring, finishes at the end of this month.

That scrappage scheme has been responsible for 20 per cent of new car registrations each month since it was launched – with the government and motor manufacturers each effectively giving punters 1,000 to the cost of a new car when they traded in a vehicle over ten years old.

Initially seen as a way to kick-start a languishing sector, the scrappage scheme also came to be seen as welcome on environmental and safety grounds. But the sector will have to do without this significant fillip in a few weeks time.

The SMMT believes that, as a result, overall car registrations this year will be down at about 1.8 million, compared with 1.99 million in 2009.

A VAT rise is looking very short-odds after the election as an incoming government tries to crawl out from under Britain's debt mountain, and that would also hobble the car industry; as would any increase in fuel taxes in the up-coming Budget.

Meanwhile, it is likely that manufacturers and dealerships will try to rebuild profit margins as stocks dwindle.

Current anecdotal evidence suggests price increases of up to 15 per cent on a year ago are not rare – with the obvious potential impact on sales.

The sector's partial resurgence – and better financial strength – are definite positives. But the indications are that, like many another business sectors, motors may be looking at further stabilisation in 2010 rather than having any unrealistic eating-up-the-road performance expectations.

One step forward, two steps back for sterling

STERLING took a fresh pounding yesterday. The reason was the latest bleak trade figures for the UK fuelling worries about our sovereign credit rating.

Sterling, which had clawed back a little of the lost ground last week amid market concerns about the prospect of a hung parliament, sank back to a one-week low below $1.50 and hovered around 1.10.

A sharp decline in UK exports was particularly disappointing given the highly competitive level of the pound in recent times.

If our exports industry cannot perform in this advantageous currency context what hope when sterling eventually begins to rise again and makes our exports dearer?

Against a UK trade gap with the rest of the world rising to 8 billion from 7bn during January, that wish for a rebalancing of the UK to an exports-led economy looks more a chimera than ever.

It's a pity because recent services and manufacturing data was more positive. Now it looks like one step forward, another back.