BRITAIN’s biggest car dealership, Pendragon, which said eight weeks ago that it was difficult to forecast year-end profits after a sharp fall in sales, will announce this week it will slash its dividend.

Trevor Finn, the group’s chief executive, is to scale down the payout to reflect the tougher economic conditions Pendragon is facing. But it is understood he will not scrap it.

The national dealer, which runs a network of more than 300 sites, will reveal when it reports full-year results that pretax profit has collapsed from the previous year’s figure of £34.8m on sales of £5.1 billion. However, the company will still be in profit - helped by a £15m Vat rebate - even after bearing the cost of 500 redundancies across the group. It is still generating cash.

Pendragon could also surprise investors with the news that group debt has fallen by at least 10% from £300m and that it is sitting on non-income-producing property assets worth £60m that could be sold.

The group has seen its share price mauled over the past year. It has fallen from 80p to a low of 7.5p before recovering in the past few weeks to 8.8p, valuing the company at £58m. The 80% fall in the share price has been exacerbated by concerns that the company will have to renegotiate its bank covenants.

However, Finn is expected to show that the group’s earnings are more robust than its critics claim. Car servicing and leasing account for nearly 50% of gross profits.

Similarly, the big car manufacturers ensure that they protect their dealers during harder times. This is also expected to help Lookers, a rival car dealer, which is reporting its half-year figures this week.

Manufacturers such as Ford, Vauxhall and Tata, which owns the Jaguar and Land Rover marques, make it easier to achieve bonus targets on lower sales volumes. They accept that Pendragon has seen a sharp fall in the sales of big luxury cars and has also been hit by a fall in profit margins on nearly new used cars. They also value a long-term relationship with the country’s largest dealer.

A number of analysts are looking closely at the shares in the belief that they will respond well to an improving economy. But as a broker note from Citigroup said last week, the question is when. It read: “While we think upside potential is attractive for current shareholders, to turn a buyer would require a leap of faith not acceptable in this environment. Perception of financial stability will be key to any prolonged share-price recovery, and this is unlikely to be achieved in the short term.”

Pendragon has been the most acquisitive player in its sector, buying rival dealers such as Dixons, Reg Vardy and CD Brammall. An attempt to buy Lookers, though, failed after a highly contested battle.

At its peak during the year ending 2006 Pendragon made a pretax profit of £69.4m. It has also expanded into America and is the largest seller of Harley-Davidson motorbikes outside the US.

Most of the big European and American car manufacturers have announced sharp falls in profits over the past few months. They are trying to reduce overheads to cope with falling consumer demand, particularly for big cars that have been affected by the soaring price of fuel.

Analysts say that in difficult trading conditions car dealers tend to concentrate on selling older used cars, where it is easier to make a profit and the depreciation is much lower than on new cars.

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