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Inchcape PLC suspends its share buyback programme in light of COVID-19

Inchcape PLC (LON:INCH) has announced it has suspended its share buyback programme in light of the current COVID-19 crisis. We believe this is the right stance to take in the current environment, with capital expenditure and dividends potentially saving a further £175m if required. Guidance for 2020E has been suspended for now, which is understandable given the complex supply/demand dynamics across multiple markets. The next update is Q1 IMS on 21 May, where we might get some further colour, but for now we will watch developments in each of its key markets closely.

  • Share buyback programme: We note comments from Inchcape this morning stating that it has temporarily suspended its £150m share buyback programme. To date Inchcape has spent c£25m on the programme. We believe this is a prudent and sensible step in the current environment, and this should ensure Inchcape has maximum flexibility and capacity when the COVID-19 crisis subsides. We have focused on Inchcape’s capital allocation track record in detail in previous notes and believe this will remain a strength of the investment case on a long-term basis.
  • 2020 outlook: Understandably, the company has decided to suspend its guidance in the current environment. To date, the Group has traded in line with expectations, but clearly this will become a moving feast globally. Clearly there are supply and demand side factors to consider across all parts of its business making this task near impossible for the foreseeable future. What we do know is that in Asia, Hong Kong and Singapore remain open at this time, which we view as a positive given the recent effect of COVID-19 in China. We note that the UK Government decision to scrap business rates on UK dealerships will save c£10m per annum.
  • Zeus Capital Forecast changes: We have removed the share buyback from forecasts other than the £25m done to date implying the Group will end FY20 with net cash of £157.7m (previously £34.5m). Our earnings forecasts remain unchanged until further guidance is given, which could be during its Q1 IMS scheduled for 21 May 2020.
  • Investment view: We believe its correct to focus on the balance sheet at present, and believe Inchcape are taking the right steps to ensure the Group is in the most flexible position after this crisis subsides. We note the dividend has not yet been suspended and note this costs c£100m per annum with capital expenditure of c£75m per annum as well. We believe these are further levers that could be pulled to preserve cash if the impact of COVID-19 lasted for a sustained period throughout 2020. Overall, we believe Inchcape is well managed and is better equipped than most with its current balance sheet structure to get through this crisis. .

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