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Inchcape: Zeus Capital reinstate FY20 forecasts

Following Inchcape plc (LON:INCH) interim results reported last week, with H1 profitability and cash generation ahead of our previously published scenario analysis, we reinstate forecasts for FY20E and beyond today. Inchcape has delivered a resilient performance despite widespread market disruption. Its balance sheet strength creates the potential for further accretive M&A as well as returns to shareholders in the form of buybacks and possible return to the dividend list.

  • Post results thoughts: Inchcape H1 results, reported last week, delivered a better outturn to June 2020 than we had feared given the widespread disruption across all of its markets resulting from COVID-19. Cash generation surprised us on the upside with robust working capital management demonstrating good collaboration with OEM partners, which we see as a healthy sign over the long term, and the Group’s balance sheet liquidity remains rock solid.
  • Capital allocation remains intact: Inchcape’s capital allocation strategy remains broadly unchanged, based firmly on a disciplined approach. The Group is committed to investing in the business including in technology to help drive organic growth, as well as an ongoing focus on portfolio optimisation. Dividends will be resumed when appropriate and the policy remains to pay 40% of basic EPS. The Group historically targets value accretive M&A with return hurdles targeted in years 2-4 and Inchcape has indicated they remain “alive” to such opportunities given its significant liquidity position. Share buybacks will also resume at the appropriate time post COVID, with a view to return excess FCF post dividends and M&A to shareholders.
  • Forecasts reinstated:We reintroduce forecasts today, with FY20E based on trading disruption moderating across all regions over H2, reflecting the improving run rate seen in recent months. In FY21E we forecast a sharper recovery as markets normalise, in line with industry forecasts published by IHS Automotive (FY21E new car volumes forecasts +14% YOY) and a return to more typical levels of organic growth in FY22E with sales approaching FY19E levels on a pro-forma (ex-disposals) basis.
  • Approach to valuation:Based on our revised forecasts which assume a broad based recovery out to FY21E, we consider Inchcape’s value through both a base case DCF and an acquisition model that assumes c.£40m investment in acquisitions per annum, leveraging the Group’s strong balance sheet position and liquidity headroom. We also consider valuation against a mid-cycle earning rating of 14x based on 2022E EPS and assuming an average of all three approaches we arrive at a valuation of 815.9p per share, which implies c.87% upside from current levels following recent share price weakness.

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