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Inchcape "continues to display underlying resilience" says Zeus Capital

While Inchcape plc (LON:INCH) no doubt faces some challenging market conditions at present, with the impact of Coronavirus also an unknown, we believe the business continues to display underlying resilience with a good track record of market outperformance and cost control. The balance sheet is in strong shape and is being put to good use to enhance future shareholder returns. We tweak down our forecasts post results but continue to believe the medium-term upside is attractive based on our intrinsic value analysis pointing towards 850p per share. 

  • 2019 results: Inchcape has delivered FY 2019 results 5% ahead of our forecasts at the adjusted PBT level, following a mixed 2019. The impact of the Yen had been well flagged with clear headwinds in Singapore, Hong Kong and Chile. That said, the performance in Europe appears to be picking up and is encouraging. The dividend was maintained, and the Group has launched a new £150m share buyback programme showing confidence in medium term prospects.
  • Key drivers: Distribution generates 91% of trading profits, and excluding the Yen headwind, was flat YOY. Europe saw an improved performance on the whole, with good resilience in Australasia and Asia (growth delivered in profits despite falling markets). That said, there were clear headwinds in Singapore and Hong Kong, with the Chilean market also contracting. Supply constraints in Australia and Ethiopia eased during H2 relative to H1, which helped to improve underlying performance. Inchcape’s continuing Retail operations were stable during the year.
  • Forecasts:We have tweaked our forecasts following the 2019A performance and have factored the higher levels of sterling and impact of translation into our forecasts. Our forecast assumptions were already at the lower end of the consensus range. We have not factored in any impact of the Coronavirus into our numbers as we believe this is too early to assess. The company has indicated that the impact of the Coronavirus hit February profits by c.£2m.
  • Investment view: Inchcape trades on a 2020E P/E of 11.6x falling to 10.5x in 2021E, which we believe is at odds both versus its distribution peers, as well as its impressive FY19A ROCE performance of 22%. The average share price outcome based on our valuation techniques pointed towards an intrinsic value in excess of 850p, 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 Q1 IMS in May.

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