Investment Column: Revamp takes shine off Vardy

Reg Vardy's reputation as the darling of the motor dealers has lost its shine this year. In early 1997 its shares hit an all-time high of 352p after tripling in just four years. Then investors hit the brakes. In the past 10 months the shares have dropped by almost a third.

Vardy was sufficiently concerned to rush out its interim results three weeks ahead of schedule. But the numbers, which showed a 5 per cent increase in operating profits on a 17 per cent jump in sales, did little to reassure the market and the shares shed another 5p to close at 243.5p.

The death of Diana, Princess of Wales, which affected sales in the key month of September, knocked over pounds 0.5m off profits. But Vardy says reorganising its dealer network is the main reason for the margin squeeze.

As one of the most successful dealers around, Vardy is in great demand with manufacturers as they seek to award larger franchises. Long term, this is good news. But in the short term it must absorb the cost of buying, relocating and refurbishing various dealerships.

In the six months to October, Vardy added five franchises to its network, taking the total to 51. The group expects to hit its target of 60 some time next year. It has also launched a contract hire business, which lost pounds 240,000 in the period and will not break even until 1999.

With gearing of just 7 per cent, Vardy can afford to splash out. While the benefits will take several years to flow through, they should be worth the wait. Williams de Broe, the stockbroker, has pencilled in a full- year profit forecast of 18.7m, placing the shares on a forward p/e ratio of 10.5. For most motor dealers, this would be fair. But given Vardy's superior track record the shares are worth a look.