Risk-tolerant investors seeking a stock with potential to rally should look at Pendragon (PDG), the unloved automotive retailer whose positive momentum has carried over into 2023.

While the business faces near-term economic headwinds, this downbeat outlook is more than priced in with Pendragon trading on a single digit multiple of forecast earnings. That is too low for a market leader that has recently drawn takeover interest, while Berenberg’s 35p price target implies the share price could more than double over the next 12 months.

Pendragon sells new and used vehicles in the UK through brands including Evans Halshaw, Stratstone and Car Store, a digitally led used car sales and servicing business. A key point of differentiation from peers is Pinewood Technologies, the group’s software division whose main product is a cloud-based comprehensive dealer management system which it sells to retailers across the globe.

Results for 2022 revealed 6.7% like-for-like revenue growth and a better-than-feared 31% drop in adjusted pre-tax profit to £57.6 million, delivered despite higher operating costs and a rising interest bill.

Underlying earnings before interest and tax in the first two months of 2023 was ahead of 2022, while the important plate-change month of March also started with good momentum. It has a 2025 pre-tax profit target of £85 million to £90 million.

Pendragon’s shares plunged in December after largest shareholder Hedin withdrew a takeover offer and more recently, activist investor Palliser has called for a shake-up of the company, although strategic progress continues apace with CEO Bill Berman behind the wheel.

The company will work with Chinese electric vehicle group BYD (1211:HKG) as a UK launch partner in 2023, the first new car maker with which Pendragon has worked in decades.

Investors need to understand the risks before buying the shares. They include competition in the UK car retail market and a possible automotive sector slowdown that would create significant operational challenges for Pendragon. There is also a court case involving a reseller of its Pinewood technology.

Pendragon has deep value appeal, trading on just 6.3 times Berenberg’s 2.6p earnings per share estimate for 2023, falling to 5.2 times based on 2024’s 3.1p forecast, while net debt continues to fall and stands at just £23.3 million excluding leases, for a leverage ratio of 0.1 times.

Given impressive debt reduction, Pendragon is reviewing its capital allocation priorities including the potential for a return of capital to shareholders through dividends or share buybacks. An investor day this summer could help the market better understand the opportunities within the Pinewood division.

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