Inchcape plc Q&A with Mike Allen Head of Research at Zeus Capital (LON:INCH)


Zeus Capital Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview to discuss Inchcape plc (LON:INCH)


Q1: Now Mike, you’ve just provided a research note on Inchcape, can you talk us through your thoughts on the business model?

A1: Yes, sure. So, the business model has always been very unique but in recent months, following an acquisition in South America, it’s been geared more towards distribution. We think that’s a good move from a cash flow and return on capital employed perspective and they also have a research operation as well, one of the largest components of that is in the UK. The model on a global basis is being geared much more towards distribution which I think will generate more shareholder value.


Q2: So, how’s the balance sheet looking? What are your thoughts there?

A2: The balance sheet is very strong, very robust, Inchcape have returned about £350 million of cash to shareholders since 2013 and they recently funded an acquisition of about £200 million as well. We expect good underlying free cash flow of between £220 million to £260 million per annum and we think they’ll continue to buy stock in the markets as well so very robust finances. I think even if the business balance sheet leveraged up to about 1 times net debt EBITDA, there is significant fire power here to really bolster earnings going forward.


Q3: So, whilst you were looking at the company, what assumptions did you make for your forecast?

A3: We’re slightly below consensus in our forecasts and that’s mainly on the UK retail side as we’re quite cautious on the markets but UK retail is now about 15% of overall profits. Elsewhere, we have been fairly conservative in some of the other global operations but Inchcape has got a very strong market position in areas such as Hong Kong, Singapore etc. and even though there are challenges in some of these markets we think Inchcape will outperform.

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Q4: Now, trading has been good for Inchcape plc, the share price has seen a steady increase since December from what was just below the 600p mark to just over 800p now. What are your thoughts on the stock at these levels?

A4: I think given the strength of the balance sheet and the potential for additional fire power, I still think the shares look good value. So, to December 2017, the shares are on a PE of about 13 times and EV/EBITDA below 8 times and if you look at some of the takeout multiples from some of the UK distribution companies, such as Premier Farnell and Brammer, that looks very attractive particularly because it’s a unique global business.

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