Inchcape Q&A with Zeus Capital: Results 5% ahead of forecasts (LON:INCH)

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Inchcape plc (LON:INCH) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: Now, Inchcape have just published their full year 2019 results. Mike, what can you tell us about the highlights?

A1: The results were 5% ahead of our forecasts at the adjusted PBT level, 2019 was clearly a mixed year. The impact of the YEN had been well flagged already but there were clear headwinds in Singapore, Hong Kong and Chile as well. That said, the performance in Europe appears to be picking up which was good.

They maintained the dividend and they also launched £150 million share buy-back programme, that reflects some disposal activity last year but it also shows confidence in their medium term prospects.

Q2: What were the key drivers?

A2: Distribution now generates about 91% of trading profits so it’s heavily distribution-led, that is a good return on capital business, highly cash generative, as I said before, excluding the YEN headwind that would’ve been flat year-on-year.

Europe, as I said before, has improved on the whole and actually, there was some good resilience in Australasia and Asia as well so that was a growth in profits despite falling markets. Clearly, as we already said, there were clear headwinds in Singapore, Hong Kong and Chile as well.

There were some supply constraints the business saw in Australia and Ethiopia but that eased in H2 relative to H1 and the continuing retail operations proved to be stable in 2019 as well.

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Q3: Has this changed your forecasts in any way?

A3: We have done some tweaking following 2019, we’ve done some segmental mix tweaking, we were towards the low end of the consensus range as well. We did nudge down on numbers by about 3% and that was just the translational impact with Sterling post the election etc. so we’ve factored that into our forecasts.

It is very difficult to put in any impact on the coronavirus at the moment, that’s something that’s difficult to quantify however, the company did indicate that this hits February profits by about £2 million. So, that’s something we’ll have to consider further down the line.

Q4: What’s your view on Inchcape in terms of valuation or an investment?

A4: We think the valuation is still fairly modest, it’s on a PE of 11.6 times 2020 where we’ve taken cautious view, 10.5 times in 2021, this is a business delivering a return on capital employed at 22%.

We believe looking at long term valuation techniques that there’s an intrinsic value in excess of 850p here and we think investors should be looking at the capital allocation that this business has been delivering consistently in terms of share buy-backs, acquisitions, disposals and dividends.

Dividend yield at the moment as well looks fairly attractive, approaching 5%.

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