Inchcape continues to see robust consumer demand says Zeus

Inchcape plc (LON:INCH) Q1 trading update last week showed a strong start to the year, with revenue up 13% organically vs. Q1 2021. We upgrade our FY22 underlying PBT forecast by 2.4% to £300.3m, reflecting Management’s guidance of “at least £300m”, driven by continuation of high margin trends, the acquisition of Ditec in Chile, less the impact of the Russia disposal. This is an upgrade to the forecasts for the underlying business excluding Russia. The quick resolution of the Russia exit allows the Group to focus on growing other areas of the business, such as making acquisitions in Distribution, with the Group reportedly actively pursuing targets across all geographies. Trading on 12.3x FY22 earnings, with high earnings quality and strong growth prospects, we think Inchcape shares are still undervalued, our SOTP analysis suggests a value of 1,191.3p per share.

¨ Q1 trading update: Q1 revenues were £1.8bn and +13% on an organic basis (ex Russia), with Distribution +11% and Retail +18% on the same basis. Across most of its markets, Inchcape continues to see robust consumer demand, supply shortages but higher margins and record order books for new vehicles. This is expected to remain the case for the rest of the year. The sale of the Russian business has been agreed to local management led by the current CEO and CFO. This is expected to close in May, at a price of €76m (£63m) that will be deferred over a period of 5 years through annual instalments. This will crystallise an exceptional loss before tax of c£240m, of which c£140m relates to FX losses.

¨ Forecasts: We have adjusted our forecasts to reflect the Russia disposal, Ditec acquisition, and the new guidance that FY22 underlying PBT will be “at least £300m”. Our FY22 revenue forecast decreases by 9.6% due to the Russia disposal (the business generated c. £740m revenue in FY21) and ongoing vehicle supply shortages, albeit this is partly offset by the acquisition of Ditec (c. 7/12 x £130m annual revenue). Higher margin assumptions improve our underlying PBT estimate by 2.4% to £300.3m in FY22, which represents a c. 25% increase on FY21 PBT of £240m (excluding Russia). We forecast an exceptional cost of £240m in FY22 for Russia, £10m of profit from discontinued operations, and account for estimated disposed fixed assets. We also incorporate our estimates for the Ditec acquisition (£30m) consideration and the receipts from the Russia disposal, starting in FY23 and spread over the next five years.

¨ Valuation: Based on updated forecasts, Inchcape trades on a P/E of 12.3x FY22, which represents a derating from 15.4x FY22 earnings in our 24 February note (with our EPS forecast now 7.6% higher). In our view, this derating has been overdone, given the high earnings quality and growth prospects of the continuing business. We forecast ROCE in excess of 30% over the next three years, dividend yield above 3%, and strong FCF to lead to net cash of over £500m by FY24, providing significant firepower for M&A. The current discount to UK support services peers (21.2x P/E FY1) and global distribution peers (16.4x P/E FY1) is therefore unwarranted, in our view, and the shares remain undervalued. Our SOTP analysis suggests a value of 1191.3p per share, 66.7% upside to current levels.

Summary financials

Price714.5p
Market Cap£2,701.2m
Shares in Issue378.0m
12m Trading Range615.5p– 940.5p
Free float94.00%
Next EventInterim results – 28 July

Financial forecasts

Yr end Dec (£’m)2021A2022E2023E2024E
Revenue7,640.107,068.107,325.207,604.10
yoy growth (%)11.7-7.53.63.8
Adj. EBIT328.1338.3356380.7
Adj. PBT296300.3316338.7
EPS (p) dil. adj.55.65862.166.6
DPS (p)22.523.525.127
Net cash^378.8334.3402.7511.3
P/E (x)12.912.311.510.7
EV/EBITDA (x)5.55.75.34.8
Div yield (%)3.13.33.53.8

Source: Audited Accounts and Zeus estimates

^Excludes IFRS 16 lease liabilities

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