Last week Inchcape plc (LON:INCH) held a Capital Markets Day where it communicated the key elements of its Accelerate strategy. Through its two primary growth drivers – distribution excellence (Distribution) and vehicle lifecycle services (VLS) – the company is looking to win distribution market share and capture more of a vehicle’s lifetime value. With these growth pillars, Inchcape aims to deliver mid-to-high single digit profit growth in Distribution and an additional £50m of incremental PBT from VLS within five years. Our previous average valuation estimate of 1,112p per share represents a 30% uplift from current levels. Inchcape’s strategy, growth opportunities, and policies for cash returns support our valuation estimate and we think there is potential for further long-term upside. With blue-sky analysis, we can see a pathway to a valuation of 1,600p per share if Inchcape’s strategy is well executed.
- Distribution excellence: Inchcape is looking to extend its market leading position in Distribution by deploying its digital and data capability to quickly scale into more markets with more OEMs. With valuations becoming more sensible and the M&A pipeline improving, we also expect to see acquisitions in the next 12-18 months. By outperforming the market, improving margins, and winning new contracts, Inchcape expects a profit CAGR in the mid-to-high single digits.
- Vehicle lifecycle services (VLS): To capture more a vehicle’s lifetime value, Inchcape will launch a multi-brand used car platform, bravoauto. Inchcape has ambitions to double its annual used car unit sales to 160k within five years. The Group will also launch a digital parts platform, leveraging its digital capabilities and OEM relationships, to digitise the parts value chain. Inchcape expects to generate incremental profits in excess of £50m from these VLS strategies within five years.
- Financials and forecasts: We have made no changes to our forecasts, but the recent strategy announcements underpin our numbers and reinforces the growth prospects. The phasing of the incremental VLS profits will be back-loaded, but it’s possible that some profits from bravoauto could be earned in FY23 and that M&A will be announced, leading to Inchcape outperforming our forecasts.
- Valuation: Based on our forecasts, Inchcape is trading at a P/E of 15.3x FY1 and 15.9x FY2. This remains attractive compared to UK support services and global peers. The high ROCE (>25% FY21E-FY23E), strong cash generation and growth prospects lead us to believe the company ought to be trading on a higher rating. The average estimate from our prior intrinsic value analysis is 1,112p per share, which represents a 30% upside to the current share price. Our blue-sky analysis, which assumes the Accelerate strategy and M&A are well executed, presents a pathway to c. £500m PBT in FY26 and a valuation over 1,600p per share (at a conservative 16.0x P/E). This estimate highlights the attractive medium-term return opportunities available to investors.
