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Inchcape

Inchcape PLC Initiation of coverage – Follow the cash

Inchcape PLC (LON:INCH)  is a unique global distributor operating in 32 markets globally across the automotive value chain. The group has a long track record in effective capital allocation, delivering shareholder value through share buybacks, an attractive dividend and a disciplined M&A strategy. The share price is currently at 2013 levels, which, in our view, ignores the track record of delivery on several fronts, representing a good entry point for investors.

Overview: Inchcape is a unique, vertically integrated end to end global automotive distributor and retailer, employing over 18,000 people and operating across 32 global markets. Inchcape has a well invested business with a strong track record of delivery, an experienced management team and brand partnerships going back over 50 years in some instances. Inchcape works with OEMs from product design stage through to retailing and aftersales service, providing an end to end solution. Under the current management team, we anticipate the shift towards Distribution (>80% of EBIT) will continue, which will continue to enhance FCF and ROCE at Group level.

Investment case: Inchcape represents a unique opportunity to invest in a geographically diversified, vertically integrated, specialist distributor that is fundamentally cash generative and well positioned across its key growth markets with strong relationships with major OEMs. Management have built a long track record of disciplined capital allocation, successfully executing a focused M&A strategy to build shareholder wealth while also distributing over £1.0bn to shareholders since 2011 through dividends and share buybacks.

Forecasts: We do not factor in M&A into our base case which would represent upside to current forecasts. Our forecast assumptions are also at the lower end of the consensus range as we take a more cautious view on the UK, Asia and Australia. We have factored in a £100m share buyback into our forecasts from 2019E given the consistent capital allocation strategy that has been executed smoothly. We have assumed benign economic conditions from 2019E further into the forecast period.

Valuation: Based on our forecasts, Inchcape trades on a 2018E P/E of 8.6x and an EV/EBIT of 5.9x and EV/EBITDA of 5.1x. In our initiation note we have looked at the valuation from a DCF and SOTP basis as well as what we consider to be a conservative blue-sky analysis. The average share price outcome based using these techniques points towards an intrinsic value of 855p, which we believe is achievable within a three-year time horizon implying 57% upside from current levels.