Inchcape Plc (LON:INCH) have released final results for FY18 this morning confirming revenue growth of 3.6% YOY to £9,277m with underlying PBT of £356.8m, down 6.5% YOY and 1.7% ahead of our forecast £356.8m. A robust performance in the distribution business was partially offset by a challenging retail market, particularly in the UK and Australia. The group delivered £280.1m of free cash flow, representing a 73% conversion rate and a ROCE of 28% reflecting the long track record of effective capital allocation.
Final results: Revenues were +3.6% YOY to £9,277m (+5.8% constant currency) and was 0.5% ahead of our forecast. Group underlying operating profit was down 5.3% YOY to £385.1m (-1.4% constant currency) driven by weakness in the groups retail business in key markets such as the UK and Australia. Underlying PBT was down 5.3% YOY to £385.1m reflecting the challenging retail environment through 2018. EPS came in ahead of consensus expectation at 65.0p driven by a lower than expected tax rate. The group delivered free cash flow of £280.7m, down 11% YOY and representing a conversion rate of 73% (vs 77% in 2017A) which was slightly above the groups target cash conversion, driven by working capital benefits in Asia and Central America.
Key performance drivers: Distribution continues to be a key driver of growth, increasing its share of the underling operating profit, with distribution operating profit up 2.2% YOY, excluding the accretion of the new Central American businesses this was up 3.0%. Growth in distribution was largely driven by Asia. The strength in the distribution business was offset by weakness in retail where market driven factors in key markets such as the UK and Australia have caused significant margin pressure and a 59.2% decline in retail trading profit.
Forecast assumptions: We will firm up our forecast assumptions post the analyst meeting but expect a to reduce 2019E adj. PBT forecasts by c.5% reflecting continuing challenges in key retail markets and the impact of IFRS 15.
Outlook: The group continue to expect a robust performance in the distribution business for 2019E. While challenges remain for this part of the business, including transactional headwinds in Australasia, a cooling property market in Australia and a continued decline in Singapore, distribution continues to be the growth driver of the group. The retail outlook has more uncertainty, but the group are taking action to rationalise the cost base in this part of the business and expect a more stable performance in key markets such as the UK and Australia.
Investment view: On downgraded forecasts we expect the company to trade on a P/E of c10.0x with a ROCE of 28%. We remain comfortable with the assumptions made in our initiation note in December (when the share price was 544p). The average share price outcome based on our valuation techniques pointed towards an intrinsic value in excess of 850p, which we believe is achievable within a three-year time horizon, which implies 43% upside from current levels. Following these results, we believe the Group is on track to achieve this, and believe these results should be taken well by the market
