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Inchcape “scope for further significant cost savings and efficiencies” says Zeus Capital

Inchcape plc (LON:INCH) has delivered H1 results, which are heavily impacted by COVID-19, but are ahead of our initial modelling expectations published in our last note. The Group appears to have outperformed in some of its key markets, whilst maintaining a robust balance sheet, with liquidity benefitting from strict working capital discipline driven by effective inventory management, with a cost reduction strategy now well underway. Overall, we continue to believe Inchcape is better equipped than most to get through this crisis and believe it should benefit from geographical diversification and its focus on Distribution.

H1 results: Inchcape has delivered H1 results, which are heavily impacted by COVID-19 as anticipated. Revenues were -36% YOY at £3,019m, which is slightly better than the £2,868.7m we modelled in our last note, with adjusted EBIT at £28m -84% YOY and compares to the £22m we modelled. Adjusted PBT was £9m and -94% YOY and compared to a loss of £8m we anticipated. Net cash was £89m at the period end, with FCF of -£5m during the period, and the CCFF fully repaid amounting to £100m in July. As anticipated, there was no interim dividend, and the ROCE calculated on a 12-month trailing basis was 14% vs. 19% last year. There were exceptional charges of £198m due to the impact of COVID-19, with £185m relating to goodwill and site impairments, of which £160m relates to its retail operations.

Key drivers: Distribution saw revenues -27% YOY, with operating profits declining from £160m to £46m during the period. Within this, margins fell 4ppt to 2.7% with margins contracting across all regions. Retail revenues were -43% YOY or -30% on an organic basis (adjusting for disposals), with the Q2 performance down significantly due to closures (both UK and Russia were shut during April and May). As a result, the Retail segment generated a loss of £18m during the period vs. an operating profit of last year. We have seen a sharp recovery in UK activities in Retail during June as reported in our last sector note (available on request). Cost initiatives are well underway, with a new programme expected to deliver benefits of>£90m (11% of overheads) of which c50% will be retained when revenue recovers.

Outlook: Whilst most markets have now reopened (ex. Chile, Costa Rica and Panama) with all regions trading profitably in June, the Group is not formally giving guidance given the lack of visibility and ongoing uncertainty regarding a second wave of the virus. However, it appears that the trough point to date occurred in April, and the H1 performance is better vs. our initial expectations. A robust balance sheet has also been maintained, driven by effective cash flow management in a challenging environment.

Investment view: Whilst there is no doubt Inchcape faces pressures at present, we believe it has sufficient liquidity to withstand this crisis within its current banking facilities and see scope for further significant cost savings and efficiencies that should help mitigate current pressures and emerge as a leaner business post COVID.

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