Introducing Pinewood Technologies aka Pendragon

Another Oak Bloke 2024 Pick

Photo by Ravit Sages on Unsplash

Pendragon Plc is selling up. Selling most of its business. For £367m to a US car dealer called Lithia.

This will provide a 24.5p/share special dividend. Then this will leave behind an asset you can buy for a net 7.5p/share or £120m for the whole lot. This residual business is called Pinewood Technology so Pendragon will change name to become Pinewood.

With £25.3m Recurring Revenue and £11m EBITDA in 2022 (and up 16.9% at £6.5m EBITDA in H1 2023), and 32,800 users up 7% for the period you are buying a SaaS business, not a car business.

How many car companies advertise on Twitter/X?

You probably have seen how businesses are shunning Elon’s X platform and his go forth and multiply thyself outburst (hey Bob) which left Andrew Sorkin gaping in surprise and shock.

The reason I show this video is simply this - if you sell Car Dealer Software and you are (were) a Car Dealer how many of your competitors would buy your product?!

So if Elon sold Twitter probably Ford and GM would advertise there again (as long as the new owner doesn’t tell them to eff off). Pinewood will no longer be owned by Pendragon.

DMS - Dealer Management Software

After all Pendragon’s platform is one of the best out there. There are some real stinkers out there too. Think 1980s monochrome. I personally know a car dealer who this year told me their system took 10 minutes to return a simple data query. And then they have to dump it into Excel and clean up the data…. what?! Or lots of firms with no system (paper and info inside people’s heads) or even just running separate systems in siloes. “Digitisation” has usually meant lots of little siloed systems for car dealers where nothing is joined up.

Pinewood provides an end-to-end CRM, mobile Apps, digital payments and banking integration, business intelligence, capacity planning, stock/inventory management, automated vehicle checks via digital APIs, supply chain ERP, dealer inventory management, social media integration, digital signature capture….. a dream system.

This Pinewood testimonial is an example of this:

“The DMS is used in absolutely every area of the business, replacing lots of different systems that we had – that was fundamental in the decision process for us. Pinewood’s system has revolutionised our workflows. It’s fundamentally changed the way we operate as a business, more efficiently and more effectively. It’s very easy to learn and implement and has driven cost out of the business.”

Pinewood is ISO27001 and ISO9001 accredited and is also an accredited Microsoft Gold Partner for multiple competencies – the highest level of achievement, which can only be attained with a strong foundation of experience and a commitment to embracing new technologies, employee certifications, customer references, satisfaction surveys and system tests.

International Expansion in 2022

Pinewood has been rolling out its system across Europe and the rest of the world. In 2022, Pinewood DMS entered Sweden, Denmark, and France, covering brands including McLaren, Aston Martin, Bentley, Bugatti, and Lamborghini.

At the end of 2022 it stretched beyond Europe. Due to a strong relationship with the Porsche brand, Pinewood celebrated its entry into South-East Asia. Focused on optimising and digitalising sales activity, they were keen to immediately adopt Pinewood’s Sales+ app. Pinewood also announced its entry into the Middle East, with the first dealership now live using Pinewood DMS.

UK and Ireland Activity

Alongside Pinewood’s international growth, their Birmingham-based team also took a substantial number of new orders in the UK and Ireland. This equated to thousands of new users welcomed to Pinewood DMS and its integrated mobile apps, including the likes of DAF business Ford & Slater, and Brownhills.

Despite being a relatively new entrant to the Irish market, Pinewood hit the ground running by securing strong orders in 2022. Most notably, they implemented their system across Ireland into Blackwater Motors covering VW, Audi, Skoda, Seat, and VW Commercial Vehicles. With a healthy pipeline and an abundance of interest registered, Pinewood looks to continue making good progress in Ireland in 2023.

OEM Certification

In September 2022, BMW Group Northern Europe announced Pinewood DMS as its first certified system for retailers in Denmark, Sweden, and Norway – following the completion of a rigorous certification process and previous certification with BMW UK. Pinewood commented: Our partnership with BMW maximises productivity for retailers, reducing costs, and bringing flexibility to more dealers in the network. Retailers can be confident that they’re complying with BMW standards – with automatic data sharing between dealers and BMW Group.”

The Future

Lithia will be a 16.6% shareholder in Pinewood subscribing to £30m of shares.

Lithia and Pinewood will also be forming a JV (49% Pinewood and 51% Lithia). Its first customer will be Lithia. This alone is worth £40m revenue for its 296 dealers at £12k per dealer per month. That’s a £22.5m EBITDA.

The US market contains 18k car dealers so a TAM of £2.6bn; while Canada has 3k dealers - so another £0.4bn. Bizarrely (at least I think so) the UK market is thought to be only £0.1bn according to Zeus. There’s no way the TAM for the UK is 1/4 the value of Canada. Autotrader tells me there are 13,112 UK car dealers. For Europe I’m extrapolating the known estimates, adds £2.4bn and Asia £4bn more. So £9bn or so.

Valuation

Assuming a CAGR of 12% in 2024 £15.8 EBITDA translates to about £8m net profit.

The JV in 2024 assuming a 6 month ramp up boosts this by £5.5m EBITDA and +£2.5m net profit.

Assuming a £5m capital programme to reinvest into the platform that leaves around £5m FCF.

2027 and beyond sees a growing, profitable and exciting opportunity. The UK business alone foresees an EBITDA of £27m.

Zeus’ DCF analysis puts a valuation on Pinewood at 14.3p a share. But that valuation was made in January 2023 as a SOTP exercise. The JV with Lithia changes that dynamic by quite a bit. The fact Pinewood is no longer owned by a car dealer changes that valuation much more.

Even a 1% penetration to that TAM equates to a £90m+ recurring revenue. Applying a 58% gross margin, long term depreciation/amortisation of £8m and tax at 25% drives a net profit £35-£40m+. Comparing such a business with Peers Sage/GB Group/Aveva a 25X PE multiple is reasonable. That puts Pinewood on an up to £1bn market cap. So that’s 8X what you can buy it for today. Or at 15X Price Earnings it would be a 5 bagger.

Remember for every share you buy at 32p, you will receive 24.5p back in 2024 so to hold £1,000 of Pinewood you must invest £4,266 (and get back £3,266). Bizarrely this is hidden value. Why? Because it’s a hassle. A hassle for II's. A hassle for PIs. Exactly the kind of opportunity Joel Grenblatt describes in his book “You can be a Stock Market Genius”. Thoroughly recommend this book, reader.

Final Thought:

BMW’s story of mandating Pinewood for its dealers first for the UK and then for Northern Europe offers a further intriguing route to market. BMW cars have a 7.2% global market share. If (this is just my illustration reader, no announcement has been made by BMW to do this) … if BMW decided to roll out Pinewood globally what I’ve said could be a £1bn business suddenly becomes much more. How much more?

Well 7.2% of £9bn is £648m revenue. Applying the same maths with some chunky capital programme uplifts to account for scaling the software I arrive at a net profit of £225m-£250m. At a PE of 15 we are now talking £3-£4bn. A 30x-40x bagger. Is that fanciful? Why? It’s just more of the same.

This is not advice.

Oak