Performance has improved across all regions and Inchcape plc (LON:INCH) is making progress towards the objectives of its Accelerate strategy. We have increased our FY22 and FY23 PBT forecasts by 4.3% and 5.1%, respectively, to reflect higher expected margins, and have introduced FY24 forecasts.
Clearly geopolitical risk is creating market uncertainty. Following the disposal of St. Petersburg operations, Inchcape’s annual revenue exposure in Russia is c. £750m. Russia profits are no longer split out, but with overall Retail EBIT margin of 2.8% in FY21, profit is likely only c. 5% of Group total. The Group’s geographical diversification mitigates exposure to any single country. We think the Group continues to have strong growth prospects and attractive financial characteristics, and we remain comfortable with our medium term valuation.
- FY21 results: Revenue increased 21% versus FY20 on an organic basis to £7.6bn, which was up 12% on a reported basis and 3% below comparable 2019 pre-pandemic levels when adjusting for currency and disposals. Strong execution and high used car margins lead underlying EBIT to increase 100% to £328m, with margins increasing 190bps to 4.3%. Underlying PBT of £296m was 2% ahead of our forecast and underlying EPS of 56p was in line. Exceptional costs were £101m in FY21, with the major items being the Russian disposal (£72m) and accelerated amortisation (£20m). FCF generation was 88% in the year and net cash was £379m (excl. leases) at period end. Inchcape maintained its policy of a 40% payout ratio with a 22.5p per share FY21 dividend and announced a further £100m of share buybacks over the next twelve months.
- Key drivers: Distribution saw +22% organic revenue growth, with underlying EBIT increasing 76% to £246m and operating margins increasing 160bps to 5.3%. Retail revenue increased 19% on an organic basis, with underlying EBIT of £82m and a 200bps increase in operating margin to 2.8% due to high used car margins. By securing new Distribution contracts and rolling out the first of its vehicle lifecycle services (bravo auto), Inchcape is making progress with its Accelerate strategy that we covered in our November note.
- Forecasts: We note the outlook statement comments that the Group expects to see a continuation of the trends experienced last year, albeit adding caution to the ongoing impact of the vehicle supply trends we are seeing globally and the pandemic. We interpret this as supply will be restricted and margins will remain strong. We have therefore increased our adjusted PBT forecasts by 4.3% in FY22 and 5.1% in FY23. Our forecasts now extend to FY24, where we expect topline growth and improving margins as the Group executes its strategy.
- Valuation: Based on our updated forecasts, Inchcape trades on an FY22 P/E of 13.2x and EV/EBITDA of 5.6x. In our view, this is a low rating for a company with a strong track record of high FCF generation (88% in FY21), high ROCE (29.8% in FY21), a disciplined capital allocation policy, and significant M&A firepower. We have updated our valuation analysis, which results in an intrinsic value estimate of 1,113p. If medium term targets can be hit, we continue to see a pathway to 1,600p per share over time.
