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Inchcape

Inchcape PLC Cash machine

We update our forecasts to reflect a variety of underlying trends in core markets across distribution and retail, albeit headline profit forecasts remain broadly unchanged. Including the £100m buyback announced on 23rd May, the group will have returned £500m since 2013, equivalent to c.20% of the market cap, in addition to ordinary dividends. We anticipate FY 2019 to be slightly more H2 weighted vs. previous years and anticipate H1 PBT to be -14% YOY when interims are announced at the end of July. That said, we think the rating remains attractive at this juncture and captures any potential forecast risk. Inchcape trades on a 2019E P/E of 10.3x falling to 9.5x in 2020E, which we believe is at odds vs. its distribution peers, as well as the ROCE delivered of 28%.

Key trading themes: The distribution business in Asia is seeing good revenue growth, driven largely by a strong performance in Singapore with particular strength in commercial vehicle sales. Supply constraints with Subaru and a generally weaker market environment saw overall volumes decline in Australia, impacting profitability in distribution. In the UK & Europe, the weak new car market in the UK continues to act as a headwind albeit the company has been able to maintain a stable profit performance, with stronger trading is being seen elsewhere in Europe. In Emerging Markets, the key strength remaining in Russia, where the group’s ignite strategy continues to deliver good momentum in the retail business.

Forecasts: We make a number of small changes to our segmental forecasts, the reflect the underlying trends in each market as discussed above. Headline forecasts are unchanged at the adj. PBT level, but the tweaks to the segmental numbers results in small changes to revenue forecasts. We incorporate the £11m disposal proceeds in our cash flow and update our working capital assumptions for the full year. We now expect a small net cash balance at the year-end as a result with the £100m share buyback factored into our forecasts.

Investment view: Inchcape trades on a 2019E P/E of 10.3x falling to 9.5x in 2020E, which we believe is at odds vs. its distribution peers, as well as the ROCE delivered of 28%. We remain comfortable with the long-term assumptions made in our initiation note in December. Including the £100m buyback announced on 23rd May, the group will have returned £500m since 2013, equivalent to c.20% of the market cap and in addition to ordinary dividends. The average share price outcome based on our valuation techniques pointed towards an intrinsic value in excess of 81.8p, which we believe is achievable within a three-year time horizon, which implies 36% upside from current levels.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.