Inchcape delivered a stronger than expected Q3 performance says Zeus Capital

Inchcape plc

Inchcape plc (LON:INCH) has delivered a strong Q3 trading update with revenues 2% below pre pandemic revenues and margin strength continuing into the period as supply shortages start to bite. At present the margin strength is offsetting any volume declines, with management once again raising guidance for FY21 PBT to at least £290m. This will trigger an upgrade of c. 11% to 2021E EPS, with our forecast assumptions in FY22 and FY23 also at the cautious end of the consensus range. We would expect the market to react well to this update, and believe Inchcape has an exciting platform for growth backed with an effective capital allocation strategy.

  • Q3 trading update: Inchcape has delivered a stronger than expected Q3 performance with Group revenues of £1.9bn, which is +10% YOY on an organic basis and 2% below Q3 2019 level and -2% on a reported basis (+27% YTD). The upshot is that the PBT outlook is being upgraded to “at least £290m” driven by a stronger than expected margin performance. Supply side issues have started to bite, but higher than expected margins are offsetting this. The supply constraints are not expected to improve until “well into 2022”, which is consistent with what we are seeing across the industry.
  • Key drivers: Distribution saw Q3 revenues +20% YOY, but 5% below the equivalent period in 2019. Both Europe and Americas & Africa generated revenues above 2019 levels, but APAC was weighed down by the Singapore vehicle licence cycle (well flagged) and Australia faced tougher COVID restrictions. Retail saw revenues -2% YOY but was 5% ahead of the equivalent period in 2019. The performance in the UK was “relatively resilient” in light of supply constraints while revenues in Russia was above 2019 levels, with growth across all revenue streams.
  • Forecasts: The outlook statement is guiding towards a 2021 adjusted PBT of “at least £290m.” This compares to our current forecast of £260.6m, which is at the lower end of the consensus range. This is also ahead of our 2022E and 2023E expectations. This will trigger an EPS upgrade of c. 11% to our 2021E EPS forecasts. We will update our earnings forecasts post the analyst meeting at 8.30am this morning.
  • Investment view: Post this latest earnings upgrade, Inchcape is likely to be trading on sub 15x 2021E EPS, which we believe is compelling against its UK support services and global peers. Our previous intrinsic value analysis set post H1 results in August was 1,080p per share, which implies in excess of 30% upside from the current share price. We believe Inchcape has exciting long term growth prospects with an effective capital allocation strategy, and look forward to hearing more about this when it hosts its Capital Markets Day on 17th November.
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