Inchcape plc (LON:INCH) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: Mike, a pretty positive update from Inchcape. Can you explain the recent earnings upgrade?
A1: So, it was an unscheduled trading update that they made at the end of last week and they announced their continuation of encouraging trends they saw across the business, with an uptick in demand and margin resilience. We think that was mainly in the European retail operations so that’s namely the UK and Russia where supplies shortages of used cars enabled higher margins so we think that was a key reason for the underlying upgrades and increasing gross profit per unit.
Q2: So, with that in mind, what’s your view on the current valuation?
A2: If you look at the valuation and, obviously, we’ve had a couple of upgrades in the last six months, stocks trading on just under 18 times earnings at the moment and EV/EBITDA of around seven, which we think is on demanding for a global distribution players of this magnitude and a strategic importance to the OEM.
I think what investors should bear in mind though, is the strong net cash balances that the business has got and the ongoing free cashflow generation and we’d expect the company to deploy that excess cash either into a successful M&A or further buyback or special dividends further down the line. That hasn’t been factored into the valuation at present.
Q3: Is the investment thesis still intact?
A3: We believe it is, yes. The company has been impacted by COVID-19, as many companies have, but it’s responding very well. We are seeing the improvements in profitability as the upgrades have seen, we think the long-term capital allocation strategy has been very consistent and we think that will be dialled back in as well.
Clearly the company has got some very strong relationships with OEMs in key markets and from a competitive standpoint, they continue to take market share.
The company, as an operation, continues to deliver and we think it will continue to deliver from a capital allocation and shareholder return perspective.
Q4: Finally, what catalysts should investors be looking out for?
A4: Inchcape have H1 results on the 29th of July, we’re forecasting a H1 adjusted PBT of £126.6 million, that compares to £9 million last year and £156 million in 2019 so nearly back to kind of pre-COVID levels we’re expecting.
We would expect to hear a bit more about supply shortages and how it’s impacting its core businesses in retail and distribution and we should also get an update on its strategy and any future capital allocation intentions.