Inchcape PLC Driven by distribution

Zeus Capital

Following Inchcape PLC (LON:INCH) results earlier this month, we publish our new forecasts following the segmental consolidation of divisions, and remain cautious relative to consensus (c.2% below at the PBT level in FY18E) mainly due to our UK assumptions. We believe the valuation is relatively attractive, and Inchcape is well placed for further growth given the strength of its balance sheet as it seeks to further utilise its unique global market position.

Driven by distribution: The Inchcape model has always been unique, and it skewed further towards the distribution side of the business following the acquisition of assets from Empresas Indumotora late last year. Based on our forecasts Retail is 22% of group 2017 EBIT, with the UK the largest business within this and less than 15% on that basis.

Balance sheet will unlock further growth: The balance sheet remains highly robust, despite returning £350m cash to shareholders since 2013, and funding an acquisition at c£200m. We anticipate free cash flow of £220-260m per annum through to 2019E and believe the group could withstand net debt/EBITDA of at least 1.0x. Based on 2018 forecasts and £460m of EBITDA and net cash of £169.0m, we see significant firepower to fund any further acquisition activity. A share buyback programme of the remaining £50m (from £100m set last year), and we anticipate an update on its future capital allocation strategy at the H1 results in July.

Forecast assumptions: The Group has streamlined its segmental structure based on four regions, and we have restructured our model accordingly. The UK will be streamlined into Europe; therefore, it will become more difficult to model the UK on a separate basis. However, this remains dominant in this division as we estimate UK Retail to account for c80% of regional profits. We have reflected our continued caution of the UK market into this divisional forecast anticipating a 10% decline in UK retail profitability, but anticipate Belgium to be flat and continued growth in Greece and the rest of Eastern Europe.

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 in excess of 20% and FCF yield over 6%. We note the recent acquisitions of Premier Farnell and Brammer PLC at 15.0x and 10.0x trailing EBITDA respectively. 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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