Inchcape “remains well positioned over the medium term” says Zeus

Inchcape plc (LON:INCH) has delivered a strong start to the year, showing 13% Q1 organic revenue growth, a recent Distribution acquisition in Chile as well as the sale of the Russian business agreed. The Group now expects adjusted PBT for FY22 to be at least £300m, which will trigger some upgrades to our assumptions. We continue to believe Inchcape remains well positioned over the medium term, and the recent de-rating of the shares presents a good entry point.

¨ Q1 trading update: Q1 revenues were £1.8bn and +13% on an organic basis (ex Russia), with Distribution +11% and Retail +18% on the same basis. Across most of its markets, Inchcape continues to see robust consumer demand, supply shortages but higher margins and record order books for new vehicles. This is expected to remain the case for the rest of the year. The sale of the Russian business has been agreed to local management led by the current local CEO and CFO. This is expected to close in May, with a payment price of €76m (£63m) that will be deferred over a period of 5 years through annual instalments. This will crystallise an exceptional loss before tax of c£240m, of which c£140m relates to FX losses.

¨ Key drivers: Distribution saw revenues ahead of the prior year and Q4 2021 driven by the Aftermarket supporting performance against lower supply. Performance within the regions was consistent vs. H2 2021 with particular strength in the Americas and Europe. Retail saw strong growth in the UK despite low supply, albeit this was against weak comparatives from Q1 last year when it was significantly impacted by COVID.

¨ Forecasts and outlook: We continue to believe that both organic and acquisition-led growth across the Group’s geographically diverse Distribution business will offset the profit impact of the cessation of Russia retail operations. The Distribution market is highly fragmented, providing M&A opportunities that the Group has the firepower to execute on, as highlighted by last month’s acquisition of Ditec, the distributor of Porsche, Volvo and Jaguar Land Rover in Chile. In terms of UK retail, we note the macro headwinds and ongoing new car supply shortages worsened by the war in Ukraine, but expect continued supply shortages to bolster margins in new and used vehicles. We will reassess our forecasts post the 8:30am analyst meeting, but the Group has given clear guidance that adjusted PBT will be at least £300m (+25% YOY, FY21: £240m ex. Russia), which implies small upgrades to our forecasts.

¨ Investment view: Since the Russian invasion of Ukraine, Inchcape has experienced a de-rating, falling from a P/E of 15.4x FY22 earnings in our 24 February note to only 11.8x today, using latest Zeus forecasts. In our view, this derating has been overdone, given the relatively small proportion of total profits from Russian retail. The current valuation is attractive compared to the average of UK support services peers (20.6x P/E FY1) and global distribution peers (15.7x P/E FY1), especially with the Group’s track record of strong FCF generation (88% in FY21), high ROCE (30% in FY21), disciplined capital allocation policy, and significant M&A firepower. At these levels, with Inchcape’s high earnings quality and growth prospects, we think the shares are considerably undervalued.

Summary financials

Financial forecasts

Source: Audited Accounts and Zeus estimates

^Excludes IFRS 16 lease liabilities