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Inchcape

Inchcape “a unique investment opportunity”

Inchcape (LON:INCH) have released a Q3 trading update confirming trading in the three months to September 2019 have been in line with expectations and have reiterated full year profit guidance, excluding the AUD/JPY headwind. The group have also announced this morning the acquisition of A Daimler Bistribution business in Uruguay and Ecuador for £47m (implied EV/EBIT of c.8.5x). Given the timing of this acquisition there is no impact to 2019E forecasts. We remain comfortable with our long-term thesis set out in December 2018 and continue to see Inchcape as a unique investment opportunity. The business continues to invest in the higher margin distribution business, and growth of this segment should act as a key factor in the re-rating in our view.

Q3 IMS: Distribution revenue was up 5% during the period. In Asia there was a small decline in revenue with a weaker Singapore commercial vehicle market and negative impact from Hong Kong protests, as expected.  Profits in Asia were supported by aftersales growth and strong cost control. Supply look to now be normalising in Australia which has led to a materially improved revenue performance vs H1, but this remains a challenging market. Profits in Australia are resilient excluding the currency headwinds with mitigating action starting to drive a small benefit. The group continued to see good momentum in the UK & Europe and captured further market share during the period. The group saw an improved performance in Ethiopia, reflecting better currency availability; with large orders on track for Q4 delivery. South America sales were strong despite a weak Chilean market and Central American sales were stable in a soft market. In the retail business revenue was up 1.0% overall (+6% excluding disposals). In Australasia, losses were stable YoY and the group expects the disposal of the majority of the retail operations here to complete in Q4. Profits were in line with expectations in the UK & Europe, but the UK market remains challenging (October SMMT data -6.7%). In emerging markets, the group’s ignite initiatives continue to drive revenue growth in Russia, but competitor discounting is putting pressure on margins.

Acquisition of Autolider: The group has acquired Autolider for a consideration of £47m. Autolider is the distributor of Mercedes-Benz passenger and commercial vehicles in both Uruguay and Ecuador. Autolider is also the distributor of Daimler’s Freightliner and Fuso brands in Uruguay. This acquisition is consistent with the group’s focus on core Distribution business and on the disciplined re-allocation of capital; follows the recent disposals of less strategic Retail-only assets which will generate c.£250m on completion.

Forecasts: We leave our underlying trading assumptions for 2019E unchanged following this update and we will take a closer look at 2020E and 2021E in due course. We factor in the £47m consideration for the Daimler distribution business and now expect net cash at the end of 2019E of £208m going to £232m in 2020E.

Investment view: Inchcape trades on a 2019E P/E of 11.4x falling to 10.7x in 2020E, which we believe is at odds vs. its distribution peers, as well as the ROCE delivered of 18%. The average share price outcome based on our valuation techniques pointed towards an intrinsic value in excess of 869p, which we believe is achievable within a three-year time horizon, which implies 41% upside from current levels.