Investment Summary
 

1. Inchcape Plc has a high cash generative business model, which benefits its sustainable growth of the business.

2. The company focuses on high growth markets which would enhance its margins. Currently, it operates in around 32 global markets.

3. The strategy of the company drives its organic performance ahead of market growth.

4. Its continued consolidation in a fragmented market would create value for the stakeholders.

5. The company is well-positioned to benefit from the future developments of the industry.

 

Business Overview

Inchcape Plc (LON: INCH) is a London, United Kingdom-based automotive retailer and distributor. The group functions in around 32 national markets. The company’s business is differentiated in three segments: Distribution, Retail and Central. The Distribution segment comprises geographical regions, such as the United Kingdom and Europe, Asia, Australasia, and Emerging Markets. The Retail segment comprises geographical regions, such as the United Kingdom and Europe, Australasia, and Emerging Markets. The company keeps relationships with a range of retail techniques, with Web responses, strategies, tailored social media campaigns and opportunities.

Key Statistics




Top Shareholders


Source: Thomson Reuters

Business Model

Inchcape’s business model is divided into four parts:



(Source: Preliminary Presentation, Company Website)
 

1. Strong Global Presence

The company has a presence in 32 countries around the world, which helps in the growth of its business and reduces its portfolio risk.
 
2. OEM Brand Partnerships

The Group has robust relationships with the world’s leading OEM groups, which provide the company with an opportunity to strengthen its position across the world.
 
3. Unique Routes to Market

The company determines the specific operating model based on the market size and the potential in various countries.
 
4. Revenue Streams
 

There are various value drivers which support the Group’s revenue, and profit performance and the company is not dependent on any one revenue driver.

Business Strategy


(Source: Preliminary Presentation, Company Website)

The Group’s strategy is divided into five parts.
 

1. Lead in customer experience.

2. Become OEM’s partner of choice.

3. Deliver full potential from all its revenue streams.

4. Leverage its global scale.

5. Invest to accelerate growth.
 

Profit by Channel - FY2019


(Source: Preliminary Presentation, Company Website)

The company generated 91 per cent of its total profit from the distribution segment and the remaining 9 per cent from the retail segment.

Profit by Region - FY2019


(Source: Preliminary Presentation, Company Website)

The company generated 46 per cent of its total profit from Asia region followed by Emerging markets (23 per cent). From Australia and UK/Europe, the company generated 15 per cent and 16 per cent of its total profits respectively.

Brand Partners


(Source: Preliminary Presentation, Company Website)


The Group has a strategic partnership with various well-known brands such as Toyota, Jaguar Land Rover, Suzuki, Daimler, VW Group, BMW Group, etc.

Outlook - FY2020
 

1. The Group expected 2020 would be a challenging year for the company with various uncertainties around the corner.

2. The company expected a modest decline in the Group’s profit.

3. Would strategically focus on its organic as well as inorganic growth.

4. The company is monitoring Coronavirus impact on its performance and would take measures to counter its effects.
 

Recent News

On 20^th March 2020, due to ongoing Coronavirus uncertainty, the company has taken the decision to temporarily suspend the £150m share buyback programme. Inchcape Plc has a strong balance sheet and disciplined capital allocation policy. However, the company believed this is the right step at this time.  Till date, Inchcape has spent GBP 25 million on the purchase of shares in this programme.

Financial Highlights - FY2019


(Source: Preliminary Report, Company Website)

For the financial year 2019, the company’s reported revenue rose by 1.1 per cent to £9,380 million as compared with the financial year 2018 of £9,277 million, while on a constant currency basis, revenue surged by 1.3 per cent, due to the growth in the emerging markets. The operating profit before exceptional items declined by 6.4 per cent to £373.1 million in FY2019 against the £398.6 million in FY2018. On a constant currency basis, operating profit before exceptional items reduced by 6.7 per cent. Reported profit before tax stood at £401.8 million in FY2019, an increase of 256 per cent as compared to £113 million in FY2018. On a constant currency basis, profit before tax (before exceptional items) declined by 7.4 per cent to £326.3 million in FY2019 from £350.6 million in FY2018, due to the challenging retail trading environment and impact on margins. The company declared a final dividend of 26.8p per share in the fiscal year 2019.

Key Performing Indicators

Revenue


(Source: Preliminary Presentation, Company Website)

The company’s revenue increased to GBP 9.4 billion in the FY2019 as compared to GBP 6.8 billion in the FY2015. Compounded Annual Growth Rate stood at 8.43 per cent.

Operating Margin


(Source: Preliminary Presentation, Company Website)

The company witnessed a decline in its operating margin due to challenging conditions. In FY2019, it stood at 4 per cent as compared to 4.3% in FY18.

Financial Ratios
 
 

The reported EBITDA margin in FY19 was 5.30 per cent. The reported operating margin was 4.80 per cent for the FY19 as compared to 1.7 per cent in FY2018. Net margin reported was 3.5 per cent for the fiscal year 2019, higher from last year of 0.40%. Return on equity for the same period stood at 24.70 per cent. On the liquidity front, Inchcape Plc’s current ratio stood at 1.15x. On leverage front, the debt-equity ratio of the Inchcape Plc’s was 0.53.

Share Price Performance


Daily Chart as on 30^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 30, 2020, at the time of writing (before the market close, at 10:57 AM GMT), Inchcape Plc shares were trading at GBX 420.80, down by 3.25 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 725/GBX 405.20. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.3463. The outstanding market capitalisation was around £1.71 billion.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare Inchcape Plc with its peers, Price/Earnings multiple has been used. The peers are Dixons Carphone Plc (NTM Price/Earnings was 5.47), Vivo Energy Plc (NTM Price/Earnings was 6.15), JD Sports Fashion Plc  (NTM Price/Earnings was 12.98), ASOS Plc (NTM Price/Earnings was 17.43), Applegreen Plc (NTM Price/Earnings was 5.27) and WH Smith Plc (NTM Price/Earnings was 10.90). The average of Price/Earnings (NTM) of the company’s peers was 9.70x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Inchcape Plc with its peers, Price/Cash Flow multiple has been used. The peers are Dixons Carphone Plc (NTM Price/Cash Flow was 2.44), Vivo Energy Plc (NTM Price/Cash Flow was 4.07), JD Sports Fashion Plc  (NTM Price/Cash Flow was 7.97), ASOS Plc (NTM Price/Cash Flow was 5.66) and WH Smith Plc (NTM Price/Cash Flow was 8.36). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.70x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s EV/EBITDA multiple is 5.1x which was lower as compared with the industry, which shows that the company is underpriced than the industry and the company’s P/B multiple is 1.7x, which was lower as compared with the industry, which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Inchcape V/S FTSE-250 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, Inchcape Plc share price has declined 24.44 per cent as compared to 30.67 per cent decline of FTSE-250 index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

Inchcape Plc has a dividend yield of 6.16 per cent, which is lower than the industry dividend yield of 7.41 per cent and the sector dividend yield of 21.85 per cent.

Inchcape V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, Inchcape Plc share price declined by 22.97 per cent which is lower than the industry decline rate of 34.85 per cent and the sector decline of34.96 per cent.

Inchcape Total return - 1 year


(Source: Thomson Reuters)

In the last one year, Inchcape Plc has delivered a total return of negative 19.37 per cent while the FTSE All share index has delivered a total return of negative 19.72 per cent.

Growth and Risk Assessments

The company’s overall financial performance remained decent with improvement in the top-line and the bottom-line financial performance. But the company’s operating profit and profit before tax have declined, which questions the operational performance of the company. In UK & Australia, the company has disposed of 10 loss generating sites, generating a cash flow of £34 million. Many of the company’s markets have weakened for the period. The company’s operations are impacted by the AUD/JPY currency headwind. The company had faced challenges in the Chilean market. The company’s operations are impacted by the ongoing uncertainty created over the Coronavirus, as it would disturb the supply chain.
 
The company is focused on controlling costs and improving efficiency through Ignite initiatives. Cash generation remains the main focus of the company, and the company expects its cash conversion in line with the set guidance, supported by a declining level of capex versus last year data.

Conclusion

During the fiscal year 2019, the company witnessed a decent performance and in line with the market expectations against the backdrop of challenging conditions in several markets, which demonstrated the resilient business model of the Group. The company reported a strong business performance in Europe along with underlying resilience in Australasia and Asia growth. The Group observed some supply constraints in Australia and Ethiopia in the first half of the fiscal year 2019. However, some improvements were seen in the second half, which improved its underlying performance. Its Retail operations delivered a stable performance over the year. The Ignite strategy of the Group helps in driving growth. The Group had made strategic progress during the fiscal year 2019. It had strengthened its portfolio, acquiring Distribution contracts, various African parts and disposing of certain retail-only operations in China, Australia and the UK.  The company has made acquisitions in Latin America, focusing on its inorganic growth. Also, the Group has established its first Daimler distribution operations, which would benefit the company in the long term.

The Group focuses on optimising its performance, seizing investment opportunities, and taping the potential market with good growth prospects. The company prospects look good and the it provides an attractive opportunity to invest for the long term.

Based on the decent fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 417.20 (as on 30th March 2020, before the market close at 11:58 AM GMT) with lower double-digit upside potential based on 9.70x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 5.70x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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