Inchcape PLC

Inchcape PLC (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.

Recent News
On 5^th July 2019, the company announced  the appointment of Jefferies International Limited as a joint corporate broker, alongside J.P. Morgan Cazenove.

Trading Update (as on 23rd May 2019)
The company’s revenue increased by 3 per cent (actual currency) to £3.1 billion, while on a constant currency basis, revenue surged by 3 per cent. Profit stabilisation in Australia and the UK Retail operations. The continued main focus on capital allocation discipline of new £100 million share buyback to be completed over 2019. Progress on portfolio optimisation with the disposal of two retail sites in Australia.

Financial Highlights (FY2018, £ million)

(Source: Annual Report, Company Website)

The company’s reported revenue rose by 3.6 per cent to £9,277 million as compared with the financial year 2017 of £8,953.3 million, while on a constant currency basis, revenue surged by 5.8 per cent, due to the growth in the emerging markets. The operating profit before exceptional items declined by 5.3 per cent to £385.1 million against the £406.6 million. On a constant currency basis, operating profit before exceptional items reduced by 1.4 per cent. Operating margins decreased by 0.3 per cent to 4.2 per cent as compared with the previous year data. Reported profit before tax stood at £132.1 million, a decrease of 64.2 per cent as compared to £369 million in FY17. On a constant currency basis, profit before tax (before exceptional items) declined by 2.6 per cent to £356.8 million as compared to £381.6 million in FY17, due to the challenging retail trading environment and impact on margins. Free cash flow reduced by 10.6 per cent to £280.7 million as compared with the financial year 2017 of £313.9 million. Return on capital employed (ROCE) decreased to 28 per cent as compared with the previous year data.

Share Price Performance

Daily Chart as at July-05-19, before the market closed (Source: Thomson Reuters)

On 5th July 2019, at the time of writing (before the market close, GMT 1:32 PM), INCH shares were trading at GBX 627.50 and decreased by 0.476% against the previous day closing price. Stock's 52 weeks High and Low is GBX 826/GBX 482.20. The company’s stock beta stood at 1.18, reflecting higher volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The automotive market is undergoing significant change.Advances in technology and its effect on consumer society are redefining the automotive value chain, enabling innovation to challenge the status of the industry; new profit pools are now being found in automotive and creating competition for incumbents. The company have identified four trends with the potential to impact the business model: Digitalisation, Electrification, Connectivity and Shared Mobility.

The company expect the Group’s H1 profit to be impacted by the supply constraints highlighted, although this will have normalised impact in H2.

The company remains focused on improving the efficiency of the business through the Ignite initiatives and controlling costs in managing the headwinds expected over the year. Cash generation remains a focus of the business and the company anticipate conversion in line with target levels over the period, supported by a reduced capex level as compared with the prior year.

On the basis of above valuation, we recommend investors to keep a cautious Watch on the stock at the closing price of GBX 630.50 (as on 4^th July 2019), with support from few catalysts needs to be evaluated at a later stage.
 

Lookers PLC

Lookers PLC (LOOK) is an Altrincham, the United Kingdom-based group, which operates as motor retail and aftersales company. The company’s business is differentiated in three division: Automotive, Agricultural and Leasing. The company's operations cover all four UK countries and the Republic of Ireland where it functions through the sale of new and used cars and aftersales services.


Q1 FY2019 Trading Update (as on 31^st May 2019)
New cars market segment contributes 32 per cent of the gross profit (GP) for the company. In the UK, total new car registrations declined by 2.4 per cent to 701,036 cars; current industry forecasts by The SMMT (Society of Motor Manufacturers & Traders) for the current year was 2.3 million. Turnover of new cars surged by 3 per cent and total gross profit from new cars increased by 4 per cent. On a like for like basis, Turnover and gross profit were maintained at a similar level to the prior year.

Used cars contribute 25 per cent of the total gross profit. Turnover of used cars increased by 8 per cent. Gross profit from used cars increased by 2 per cent as compared with the prior year. On a like for like basis, turnover rose by 6 per cent and gross profit climbed by 1 per cent.

Aftersales market contributes 39 per cent of total gross profit. Turnover of aftersales increased by 11 per cent from the prior year and Gross profit surged by 9 per cent at a slightly lower margin. On a like for like basis, turnover climbed by 9 per cent and gross profit rose by 6 per cent.

Financial Highlights (FY2018, £ million)

(Source: Annual Results, Company Website)

The company’s reported turnover surged by 4 per cent to £4,880 million as compared with the financial year 2017 of £4,696 million. Gross profit rose by 2.4 per cent to £516 million as compared with previous year data, while gross profit margin stood at 10.6 per cent. Adjusted profit before tax decreased by 2 per cent to £67.3 million as compared with the financial year 2017 of £68.4 million. Profit before tax stood at £53.1 million. Adjusted earnings per share climbed by 0.8 per cent to 14.68 pence against the 14.57 pence in FY17, while earnings per share were 11.07 pence. The board proposed a final dividend per share of 2.60 pence and total dividend per share surged by 5 per cent to 4.08 pence as compared with the financial year 2017 of 3.89 pence.

Share Price Performance

Daily Chart as at July-05-19, before the market closed (Source: Thomson Reuters)

On 5th July 2019, at the time of writing (before the market close, GMT 11:56 AM), LOOK shares were trading at GBX 48.50 and increased by 3.19% against the previous day closing price. Stock's 52 weeks High and Low is GBX 113.60/GBX 46.85. The company’s stock beta stood at 0.68, reflecting lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company has delivered a positive performance over the first quarter of 2019 with continued solid momentum in both the aftersales and used car businesses, demonstrating the diversity and resilience of the company's business model. The present political environment, exchange rates and Brexit create a degree of uncertainty in the United Kingdom economy.

The company have a decent balance sheet, giving the capacity to deliberate selective strategic acquisition prospects and to continue to invest in upgrading the facilities and enhance the multichannel consumer capabilities.
The financial performance of the company in the period demonstrates the effectiveness of the strategy of having the right brands in the right locations. The company has made an excellent start to the existing financial year. The used car volumes continue to show progress and further prospects in aftersales.

Based on the decent financials which are supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 47 (as on 4th July 2019) with lower double-digit upside potential based 4.40x NTM Price/Cash Flow Per Share (approx.) on FY19E cash flow per share (approx.).
* All estimates have been taken from Thomson Reuters.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on July-05-19).

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