Inchcape “better than expected Q3 trading update” says Zeus Capital

Inchcape plc (LON:INCH) has delivered a better than expected Q3 trading update, which reflects an encouraging bounce back, and would have seen it on track to deliver a strong H2 ahead of expectations. However, given the current Covid-19 situation, management have withdrawn guidance. That said, we envisage a small increase in 2020E consensus on the back of this strong Q3 performance and will firm up our forecast assumptions post the analyst call at 8am.

Q3 update: The Q3 trading period from 1 July to 30 September 2020 came in ahead of expectations with group revenue of £1.9bn and was -10% on an organic basis and -19% reported. Improving trends were seen in New, Used and Aftersales revenue streams quarter on quarter, and it continued to outperform market volumes. Gross margins also improved resulting in a stable margin vs. the prior year, while cash generation was strong to further strengthen the Group’s financial position. Cost initiatives remain on track, and the Group also announced another distribution deal in the Americas with Daimler, which adds El Salvador to the list of distribution markets.

Key drivers: Within the mix, Distribution revenues were -21% and impacted by closures in Chile, Costa Rica and Panama (all of which have reopened in August). There was also temporary disruption in Australia, New Zealand and Guam. There were also cyclical pressures in Singapore, and its exposure to the Americas where demand was more subdued. That said, Hong Kong did improve vs. Q2, although remains below prior year levels. Europe saw sequential improvements across key markets, and performed ahead of expectations, with the businesses in Africa remaining open throughout and growing strongly. On the Retail side, Inchcape experienced a strong and sustained recovery during the period in markets that were open throughout. The performance in UK and Russia experienced a stronger than expected rebound driven both by Vehicle sales (new and used) and Aftersales.

Forecasts: Based on this better than expected Q3, Inchcape was on course to deliver a strong H2 significantly ahead of market expectations. However, due to the current Covid-19 situation with new restrictions placed on its UK and Belgian operations, management have withdrawn guidance. That said, we envisage 2020E consensus will nudge up this morning following this strong Q3 performance and will firm up our assumptions post the analyst call at 8am.

Investment view: Based on our unchanged forecasts which assume a broad based recovery out to FY21E, we consider Inchcape’s long term 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 >50% upside from current levels.

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