New strategy unfolds

Inchcape 17 March 2016 QuickView

Inchcape

New strategy unfolds

Automotive

QuickView

17 March 2016

Price

725p

Market cap

£3.13bn

Share price graph

Share details

Code

INCH

Listing

LSE

Shares in issue

432m

Business description

Inchcape is a leading global automotive distribution (78% of operating profit) and retail (22%) group. It operates in 26 countries, concentrating on a small number of key premium and luxury brands: BMW/ MINI/Rolls Royce; Jaguar/Land Rover; Mercedes Benz; Subaru; Toyota/Lexus; VW/Audi/Porsche.

Bull

Consistent and impressive recent record.

77% of underlying operating profit from Asia-Pacific and emerging markets.

New development strategy, supported by a strong balance sheet: net cash of £166.4m.

Bear

Negative market perception of automotive sector.

Investor caution about certain East European markets, especially Russia.

Impact of VW indiscretions.

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Inchcape is a unique, high-quality business with a consistent record over many years. The strategy announced this week by the new CEO points positively to the future, building on many of the group’s existing qualities. Downstream operations in the distribution and retail activities limit the likely impact of any global recession. The shares offer strong medium-term attractions.

Results ahead of expectations

Inchcape figures for 2015 show underlying pre-tax profits up by 9.2% (10.5% CCR) to £312m, slightly ahead of consensus estimates. Geographically, there were improvements in North Asia (Hong Kong) and emerging markets (except Russia), which more than compensated for reversals in the UK, continental Europe and South Asia (largely Singapore). All of the progress came in Distribution, with Retail slipping back modestly. There will, again, be mixed performances across the group network in 2016, but consensus estimates indicate further steady progress.

New management – new strategy

A new CEO was appointed in April 2015, with a new CFO joining next month. A new strategy was presented alongside the results – there is a clear determination to build on existing group strengths. Customer service is to be enhanced, with innovative investment, especially in people and IT; strong OEM relationships will be used more effectively, especially to seek out overseas Distribution opportunities; the development of used car and aftermarket facilities will be accelerated, which will involve increased throughput without a commensurate rise in establishment costs. Moreover, the central team has been strengthened, with management looking to adopt best practice on a more global basis. We see a combination of organic and acquisition based growth, with management indicating that up to £450m can be made available to support plans that meet the new investment criteria.

Valuation: Potential warrants higher rating

There is no real global comparator to Inchcape, which often tends to be viewed by the market alongside the UK dealership groups; a premium rating of c 30% (13.1x vs 10.0x) reflects the relative size and global ramifications of the group. We feel a more logical comparator would be the general retailers or support services sectors, for which the 2016 prospective ratings are 14.9x and 15.4x. We believe that the group’s consistency and potential justify at least a commensurate rating.

Consensus estimates

Year
end

Revenue
(£m)

Adjusted PBT*
(£m)

Adjusted EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

6,702

285.9**

50.2

20.1

14.4

2.0

12/15

6,836

312.1*

52.1

20.9

13.9

1.9

12/16e

7,100

328.5

54.9

23.3

13.2

1.8

12/17e

7,356

348.2

58.1

24.6

12.5

1.7

Source: Inchcape RNS; Bloomberg consensus. Note: *Pre-exceptionals. **Pre-exceptionals and one-off property disposal profit.

Disclaimer

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United Kingdom

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US

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Wellington +64 (0)48 948 555

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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