Inchcape PLC Final Results

Inchcape plc (LON:INCH) has delivered FY 2019 results 5% ahead of our forecasts at the adjusted PBT level, following a mixed 2019. The impact of the Yen had been well flagged with clear headwinds in Singapore, Hong Kong and Chile. That said, the performance in Europe appears to be picking up and is encouraging. The impact of the Coronavirus is unclear at this stage, and we maintain our forecasts for now. We continue to believe Inchcape is well placed over the medium term and note its new £150m share buyback programme announced this morning.

• Final results: Revenues were +1.1% YOY in actual currency (+1.3% constant currency) and 4.7% below our forecasts. Underlying operating profits were 6.4% down YOY, but 4.1% ahead of our forecast, as the material H2 weighting of transactional AUD/JPY was well flagged, with operating margins down 30bps YOY driven by the yen headwind. Adjusted PBT was 5% ahead of our forecast, with interest costs coming in c£1m lower than our forecast. FCF was £213m and lower than the £279m in the prior year driven by lower YOY operating profits, a higher working capital outflow and a £11m exceptional pension cash inflow during 2018. Net cash (ex IFRS 16 lease liabilities) was £103m, with ROCE (IFRS 16 basis) flat at 22%. The dividend was flat as expected. There were exceptional gains of £75.5m relating to profit on announced disposals, offset by restructuring costs, asset write offs and impairments relating to these disposals. 2018 has been restated for IFRS 16. A new £150m share buyback programme has been announced for the next 12 months.

• Key drivers: Distribution generates 91% of trading profits, and excluding the Yen headwind, was flat YOY. Europe saw an improved performance on the whole, with good resilience in Australasia and Asia. That said, there were clear headwinds in Singapore and Hong Kong, with the Chilean market also contracting. Supply constraints in Australia and Ethiopia eased during H2 relative to H1, which helped to improve underlying performance. Inchcape’s continuing Retail operations were stable during the year.

• Forecast changes: We anticipate 2020 to be a challenging year and reset our forecasts to reflect this in November last year. It is too early to assess the impact of the Coronavirus for Inchcape, albeit we already anticipated a tough year in Hong Kong and Singapore. The outlook for its European businesses appears to be improving. Ahead of the analyst meeting we are maintaining our forecasts for now.

• Investment view: Based on our forecasts, Inchcape trades on a 2020E P/E of 11.4x in 2020E falling to 10.4x in 2021E, which we believe is at odds vs. its distribution peers, as well as the ROCE delivered of 22%. The average share price outcome based on our valuation techniques pointed towards an intrinsic value in excess of 800p, which we believe is achievable within a three-year time horizon, which implies >30% upside from current levels.