Inchcape performance exceeding expectations says Zeus

Inchcape plc (LON:INCH) has released another positive trading update, with performance exceeding expectations so far this year. This follows on from a positive Q1 update on 28 April. Through quarterly improvement in Distribution volumes and operating margin, the Group has increased its FY22 PBT guidance from “at least £300m” to between £350m and £370m (Zeus estimate was £300.3m). As a result, today we upgrade FY22 revenues by 3.1% to £7.3bn and underlying PBT by 18.2% to £355.0m.

¨ Trading update: Performance in Inchcape’s Distribution business has exceeded expectations so far this year, driven by a quarterly improvement in new vehicle volumes and operating margins above H2 2021. Further, given the strength of its order books and an improved outlook on supply, the Group has increased confidence for H2 2022 performance. This has lead to an increase in guidance in FY22 PBT from continuing operations from consensus of £301m to a range of £350m to £370m.

¨ Forecasts and outlook: We upgrade FY22 revenue by 3.1% to £7.3bn, reflecting higher new vehicle volumes, and upgrade underlying PBT by 18.2%, reflecting stronger margins in this division. This upgrade improves our FY22 year-end net cash (ex. leases) by 11.1% to £371.5m, which flows through to later years’ cash forecasts. We leave FY23 and FY24 trading forecasts unchanged at this stage but plan to revisit forecast assumptions for these years when we get further detail of segmental performance in the interim results on 28 July. A summary of changes to forecasts is shown on page 2.

¨ Valuation: Based on our updated forecasts and yesterday’s close price, Inchcape trades on a one-year forward P/E of 9.9x. This is a discount to the global distribution peers (median: 12.3x) and UK support services companies (median: 18.1x) mentioned in prior notes, suggesting significant undervaluation, particularly given Inchcape’s strong fundamentals. We forecast a ROCE in excess of 30% over the next three years and a dividend yield above 3.5%. Continued strong FCF generation means we forecast net cash of over £500m by FY25, providing the funds to make acquisitions in the fragmented Distribution market and further grow earnings. We reiterate our previous valuation estimate of 1,191.3p per share, based on SOTP analysis, and will revisit this analysis when Inchcape publish interim results on 28 July.

Summary financials

Price682.0p
Market Cap£2,565.8m
Shares in Issue376.2m
12m Trading Range615.5p – 940.5p
Free float94.00%
Next EventInterims – 28 July 2022

Financial forecasts

Yr end Dec (£’m)2021A2022E2023E2024E
Revenue7,640.107,289.207,325.207,604.20
yoy growth (%)11.7-4.60.53.8
Adj. EBIT328.1393356380.7
Adj. PBT296355316338.7
Adj. EPS (p) ful dil.55.668.862.166.6
DPS (p)22.527.825.127
Net cash^378.8371.5427.7536.3
P/E (x)12.39.91110.2
EV/EBITDA (x)5.24.64.94.4
Div yield (%)3.34.13.74

Source:  Audited Accounts and Zeus estimates

^Excludes IFRS 16 lease liabilities

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