Inchcape PLC Zeus anticipate a solid set of H1 results


We anticipate a solid set of H1 results from Inchcape Plc (LON:INCH) on 27 July. We would expect most of its markets to show good YOY progress, and believe forecast risk remains firmly on the upside. The valuation remains undemanding to us on undemanding forecasts particularly in the context of the growth potential as we expect further evidence of strong execution of its strategy.

H1 results due 27 July: We are expecting a decent set of H1 results from Inchcape later this month, and are forecasting 16% revenue growth (most of this is FX assisted given it generates >85% of profits outside of the UK with a c£200m revenue contribution from the Indumotora acquisition) at £4.4bn vs. £3.8bn last year. We are forecasting underlying EBITA of £191.2m vs. £169.5m with slightly higher interest costs of £10.0m vs. £6.0m last year. If achieved, this would imply and adjusted PBT of £181.2m vs. £163.5m last year and adjusted EPS of 29.2p (assuming 25% tax rate), which would be +4% YOY. We have penciled in an interim dividend of 7.9p, which is +5% YOY.

Key themes: We anticipate Emerging Markets to deliver the strongest growth partly driven by the Indumotora acquisition, but also organic growth in the distribution business to be >10% backed with a margin in excess of 15%. Asia should also see some improvements vs. what was a difficult year particularly in Hong Kong last year with benefits likely from the cost review undertaken last year. We have been cautious with Australasia given adverse JPY/AUD FX rates, but expect the Subaru brand to make continued progress in this region. UK & Europe is also expected to progress YOY following the record Q1 experienced in the UK, and we anticipate the Inchcape UK business to outperform the market and deliver solid progress in this division under the stewardship of James Brearley. We also expect the key markets of Greece and Belgium to have also improved YOY reflecting strong growth across the continent. As the business skews more of its mix towards Distribution, we anticipate cash generation to further improve. We anticipate an update on its share buyback programme. We note management already have delivered increased M&A during the last 12 months, and have further ambitions in our view.

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Forecast assumptions: Our forecasts are at the lower end of the consensus range, albeit some of this reflects caution on the UK market. Given sterling remains weak, and could further weaken as we enter into Brexit negotiations, we believe forecast risk is firmly on the upside at present with most of its markets also showing solid underlying progress YOY.

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%. 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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