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Zeus Capital

Inchcape: Clear strategic progress

We update our forecasts to reflect a number of asset disposals completed by the group in 2019 so far. The group has continued to streamline the business and focus on the core distribution segment, which now accounts for >92% trading profits and disposed of a number of non-core retail operations in the UK, Australia and China. The shares have underperformed vs the FTSE 250 YTD and are up 11.4% YTD vs the FTSE 250 which is up 12.4%. 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 is now more focused, and growth of the higher margin distribution business should act as a key factor in the re-rating in our view.

  • Investment case unchanged: Inchcape’s core investment case based on utilising its unique, cash generative model and management’s strong track record in allocating capital effectively to deliver shareholder value remains unchanged and recent disposals are evidence of this focussed strategy, in our view. The group has continued its process of divesting loss making or non-core retail operations, freeing up capital for re-investment and allowing management to focus on the core, higher margin distribution business. Disposals have generated c.£250m of cash for the group YTD, giving them significant resources for investment/shareholder returns.
  • Portfolio optimisation: Since May of this year, the group has disposed of 6 loss making retail sites in Australia, 7 retail sites in the UK, completely exited the Chinese retail market through the disposal of 3 sites and disposed of the Inchcape Fleet Solutions business. Together these disposals have realised c.£250m net cash proceeds and we estimate that they have resulted in a cumulative £60m gain on disposal. The disposal of these underperforming and non-core assets is in line with the long-term capital allocation strategy and frees up cash for either re-investment in the core distribution business or for distribution to shareholders (Inchcape has distributed £1bn to shareholders since 2011).
  • Investment view: Inchcape trades on a 2019E P/E of 11.5x falling to 10.8x 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 43% upside from current levels. The next key catalyst barring any further corporate activity is the Q3 IMS on 7th November.