Inchcape: Update to forecasts

Inchcape plc (LON:INCH) delivered better than expected Q1 results last week and is showing signs of a broad-based recovery across a number of geographies. The Group recently announced its decision to right-size its Russian retail operations with a £70m disposal, set to complete in Q2 2021. We have updated our forecasts accordingly and our intrinsic value increases to 1,045.5p.

Q1 update: As mentioned in our flash note last week, Q1 trading results for the period to 31 March 2021 were ahead of expectations. Group revenue was £1.9bn, which was down 3% on a reported basis, but up 2% on an organic basis. Distribution revenue was up 4% YOY on an organic basis, which was offset by a 2% decline in organic Retail revenue.

Key themes: Revenue growth in the Distribution business was seen across
most regions, with Asia, Australasia, Europe and the Americas all delivering
positive YOY increases. This growth was despite many regions being under
some form of COVID restrictions during the period. The Distribution business continues to expand, with new contract wins with JLR in Indonesia and Daimler in Guatamala. The performance of the Retail operations was more heavily impacted by COVID restrictions during the period, with a national lockdown in the UK leading to closed showrooms. Despite this, Inchcape was able to operate online car retail and perform Aftersales services, which offset some of the impact of restrictions.

Forecasts: Following the announced disposal of certain Russian retail
operations (scheduled to complete at the end of Q2 2021), we have removed
£100m of revenue and £6m of PBT from our FY21 forecasts, representing six
months of the full year impact. However, given the strong Q1 performance and the recovery we are seeing across the sector, we have revised our underlying forecasts upwards which offset the disposal in part. Despite this, we remain cautious of the ongoing supply constraints in the new car market and incorporate this into our expectations.

Investment view: With our new forecasts, Inchcape trades on a 2021 P/E of 19.7x, which falls to 16.3x in FY22. This is reasonably in line with its peers. We have reviewed our intrinsic value models and the average price from these is now 1,045.5p, which would present a 33.8% upside from the current price. We think this is achievable within a three-year time horizon. Our blue-sky analysis of EPS discusses how future M&A activity, which could be funded by Inchcape’s strong cash generation, could add up to 12p to prior-cycle peak EPS, resulting in a long-term target EPS of 75p per share – at this EPS and a mid-cycle P/E of 16x, the value would be 1200p per share. Due to the fragmentation of the distribution market, Inchcape has plenty of acquisition opportunities that it could pursue to achieve significant long term earnings growth.

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