Inchcape “well placed to hit 2019E” says Zeus Capital

Revising 2020E and 2021E

We update our forecasts following Inchcape’s Q3 IMS on 7^th November, and focus our attention on 2020E and 2021E estimates after the Group confirmed it was well placed to hit 2019E last week. In 2020E and 2021E we expect a more challenging market in Asia, and currency headwinds in regions such as Australia to persist and adjust our forecast accordingly. We now expect adj. PBT in 2020E of £270.0m (vs £307.1m previously) and £268.5m in 2021E (vs £320.9m previously), which triggers a c12% EPS downgrade in each year. We remain comfortable with our long-term thesis set out in December 2018 and continue to see Inchcape as a unique investment opportunity. The business continues to invest in the higher margin distribution business, and growth of this segment should act as a key factor in the re-rating in our view.

• Forecasts: We expect weaker trading in Asia,as key market such as Singapore and Hong Kong continue to see trading headwinds. We incorporate a continued £25m JPY currency headwind, offset by £10m of operational improvements and cost savings. Stronger Sterling creates a further currency headwind, although purely translational, of c.£10m. We also trim our growth forecast in emerging markets. We incorporate these factors into our forecasts and now expect adj. PBT in 2020E of £270m growing to £283.9m in 2021E. We provide a profit bridge showing how we arrive at our new 2020E forecast on page 2. Net cash based on these assumptions is £203.9m (vs. £232.3m previously) in 2020E going to £211.8m (vs £268.5m previously) in 2021E, with the balance sheet clearly remaining very robust for further accretive capital allocation that has been well executed to date.

• Investment view: Based on our revised forecasts, Inchcape trades on a 2019E P/E of 12.2x in 2020E falling to 11.2x in 2021E, which we believe is at odds vs. its distribution peers, as well as the ROCE delivered of 18%. 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.