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Inchcape

Inchcape PLC Should continue to deliver value – Zeus Capital

Inchcape PLC (LON:INCH) Q1 trading update suggests a solid start to the year, with Emerging Markets delivering strong growth as the acquisition in South America integrates well with the Russian market stabilizing. The UK continues to grow, albeit with continued signs of margin pressure in new cars. Inchcape continues to be well positioned in Greece and Belgium. In Asia, the market appears stable following a tough period in Hong Kong and Singapore, while Inchcape continues to gain share in Australia. We will review our forecast assumptions post the analyst meeting to take account of the acquisition and the recent distribution agreement in Australia. The valuation remains undemanding to us particularly in the context of the growth potential as it continues to execute well on its strategy.

Trading update: Revenues for the first four months to 30 April 2017 are £2.91bn increasing by 17.9% at actual currency and 8.1% at constant currency. Within this, distribution revenue was +30% at actual currency (14.8% constant currency) with Retail +10% at actual currency (3.4% constant currency). Trading is said to be in line with expectations with the Group continuing to benefit from weaker sterling, albeit offset by transactional currency headwinds in Australia. Inchcape has also announced a strategic distribution acquisition in Estonia, focused exclusively on BMW, a core brand partner.

Regional performances: Asia saw revenues -3% on a constant currency basis during the period, with the Hong Kong market said to be stabilizing following a tough period. Singapore was flat albeit the pricing environment remains competitive. Australasia saw revenues +3.5% driven by a strong Subaru performance, albeit retail demand in general was weak offset by demand in SUVs continuing to grow. The UK & Europe delivered a 6% growth rate in revenue with good growth in the UK albeit with the continuation of new car margin pressure, this is consistent with what we have seen elsewhere in the industry. Also within this region was Greece & Belgium, which is well placed with Toyota hybrid vehicles. Emerging Markets saw a +48% revenue growth rate with the Russian market broadly stable, the South American acquisition performing to plan and continued robust organic growth its wider Emerging Markets Distribution business.

Forecast assumptions: Our forecasts are at the lower end of the consensus range, albeit some of this reflects caution on the UK market. We will be reviewing our forecast assumptions post the analyst meeting following the acquisition this morning as well as the recent Distribution Platform Agreement with PSA in Australia.

Zeus Capital Investment view: We continue to believe the Inchcape PLC valuation looks undemanding in the context of a peer group of international distribution companies with ROCE (post tax) more than 15% and FCF yield over 6%. The balance sheet remains very strong with significant net cash through the forecast period (£56m in 2017E despite a £100m share buyback program) and potential for a further £400m to fuel acquisition activity, providing significant upside potential. While we expect a slowdown in the UK market, UK retail now represents less than 15% of revenue, and we believe the diversified, international business model should continue to deliver value to shareholders going forward.

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