Inchcape plc (LON:INCH) held the first of its ‘In The Driving Seat’ webinars, highlighting the opportunities in the Americas, one of the Group’s fastest growing regions with compelling structural trends. The company set out the implementation of its Accelerate strategy to win Distribution market share and capture more of a vehicle’s lifetime value in the region, which we think will drive significant profit growth both in the near and long term. In our view, given Inchcape’s strong fundamentals, robust balance sheet, and well-communicated growth prospects, shares are considerably undervalued at the current rating of 10.1x FY22.
¨ Americas track record: Between 2016 and 2021, the company has grown Americas revenue by a CAGR of 40% from £0.2bn to £1.2bn (pro-forma, incl. recent M&A), with a profit CAGR of c. 50%, adding 23 new OEM brands and expanding into 9 new markets over the period. The Group has developed a scaled platform in the region, has a successful track record of integration (10 deals since 2016), and is trusted by 25 OEM partners.
¨ Growth potential: Structural characteristics that should drive growth in Americas include high forecast GDP growth, low but growing motorisation rates (193 cars per 1,000 people, vs. 700 per 1,000 in developed markets), an underserved and unprofessional used car market, a rebound in new car sales to historic averages, low EV penetration, and growing use of household credit. There is potential for volatility in some markets, particularly given global macro headwinds, but the broad portfolio of 25 brand partners and 11 geographies should provide some diversification.
¨ Distribution excellence: Inchcape currently distributes c. 40k new vehicles p.a. in Americas out of a regional total of 1.8m, giving it a c.2% market share and making it the largest independent distributor by some margin. We see significant potential for market share gains via acquisition from a pool of >300 independent distributors and expansion into the 15 other markets in the region (e.g. Puerto Rico, Bolivia, Paraguay). As it did with Mercedes in 2019, the company can also win Distribution contracts from major OEMs who are outsourcing distribution in developing markets. The company’s digital and data expertise (discussed in our 22 November 2021 CMD note) differentiates itself from its competitors and allows quick integration of acquisitions. As well as top line growth, we think that more brands and markets should drive further operational leverage in the region over time.
¨ Vehicle lifecycle services: In H2 2022, Inchcape will be rolling out its digital-first used car brand, bravoauto, in Colombia. This a fragmented market with >1m used car transactions a year, making it an attractive launch-pad for the brand in the region. At the CMD in November 2021, the Group said it plans to generate an additional £50m of incremental PBT from VLS within five years, which is another source of long-run earnings growth.
¨ Forecasts and valuation: Following a trading update on 16 June that reported strong trading year-to-date, we upgraded FY22 revenue by 3.1% to £7.3bn and underlying PBT by 18.2% to £355m, leaving FY23 and FY24 unchanged. We plan to revisit forecast assumptions at the Interim results on 28 July. Based on current forecasts, Inchcape trades on a P/E of 10.1x FY22 with a dividend yield of 4.0%. We remain confident in our previous valuation estimate of 1,191p per share, based on SOTP analysis, which we think is supported by forecast fundamentals and their long-run growth prospects.
|Shares in Issue||376m|
|12m Trading Range||615.5p– 940.5p|
|Next Event||Interims – 28 July 2022|
|Yr end Dec (£’m)||2021A||2022E||2023E||2024E|
|yoy growth (%)||11.7||-4.6||0.5||3.8|
|Adj. EPS (p) ful dil.||55.6||68.8||62.1||66.6|
|Div yield (%)||3.2||4||3.6||3.9|
Source: Audited Accounts and Zeus estimates