Inchcape (LON:INCH) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: Inchcape, you’ve just put a new note out on the company, what was the reason for this?
A1: I think the real reason for it was obviously, the company have done a number of disposals recently, in the last few months, and that’s ticked up to be quite material in numbers.
So, essentially, they’ve raised about £250 million of cash, we think there’s some interesting gains on disposals there as well of around £60 million.
We just felt it was worth highlighting what they were doing there and this company has got an excellent track record of returning cash back to shareholders in terms of dividends and share buyback. If you look at what they’ve done since 2011, they’ve distributed accumulative £1.2 billion back to shareholders since then through dividend and share buybacks.
So, in our mind, the fact that they’re making interesting disposals and optimising their asset base, we think puts them in a strong position to do more of this going forward.
Q2: In terms of an investment case, has anything changed?
A2: No, we initiated on the company about a year ago, the core investment case was very much based on utilising its unique cash generative model and management have a strong track record in allocating capital efficiently to shareholders. We think they’ve provided more evidence of them doing that in recent months.
We’re very happy with the investment case and believe that as it moves further towards distribution and given the turn on capital it’s currently generating as well, we continue to believe it’s a clear view rating opportunity.
Q3: Just in terms of the portfolio, what’s been happening there?
A3: Since May of this year, they’ve disposed of 6 loss-making retail sites in Australia, 7 retail sites in the UK, they’ve completely exited the Chinese retail market through 3 site disposals and they’ve also disposed of the Inchcape Fleet Solutions business in the UK. As I said, that’s realised around £250 million of net cash and we think accumulative £60 million again on disposal as well.
A lot of these assets are either non-core or we think that they can return better returns if they concentrate on the core distribution model.
Q4: How do you view Inchcape’s valuation at the moment?
A4: We think the valuation continues to be low, the share price is broadly tracked to where the FTSE250 is this year but the company trades on a 2019 PE of 11.5, falling to 10.8 in 2020, we think that’s at odds with the ROCE it delivered of about 18%.
If you look at other companies in the support services specialist distribution sector, such as Bunzl, DCC, Diploma, Electrocomponents, Intertek etc, the ratings there are a lot higher. So, in our note, we’ve plotted the PE’s verses ROCE’s and we think the company is a clear anomaly out there.
