Inchcape Plc - Highly cash-generative business with a strong balance sheet

Inchcape Plc (LON: INCH) is a London, United Kingdom-based automotive retailer and distributor. The Company’s business is differentiated in three segments: Distribution, Retail and Central.

On 5 November 2020, the Company will announce Q3 trading update.

Rationale for Valuation – Hold at GBX 458.97

• On the liquidity front, the current ratio was 1.20x in H1 FY20, which was higher than the industry median. This reflects that the Company has sufficient current assets to pay short-term obligations.
• Inchcape Plc has a high cash generative business model, which benefits the sustainable growth of the business.
• The Company seems to be well-positioned to benefit from the future developments of the industry.
• From the technical standpoint, 90-day RSI stood at 48.11, which is supporting the upside movement.

Key Risks

• The Company’s operations are impacted by the ongoing uncertainty created over the Coronavirus, as it would disturb the supply chain.
• The business is exposed to steep competition and price war.
• In the wake of increased unemployment and falling purchasing power, it could lead to lower demand, especially for the non-essential products.
• As the lockdown measures continue to ease and societies and economies begin to reopen after months of closure, the markets are watching lenders’ credit activities and risk appetites with keen interest.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 30 July 2020)

(Source: Company Website)

• Inchcape witnessed a strong balance sheet, with total liquidity of more than £1 billion and a net cash position of £89 million.
• The Company’s operating profit was significantly affected by COVID-19 pandemic and declined ~84% to £28 million in H1 FY20 as all the business operations were mostly closed during the second quarter.
• Inchcape is also eligible to the UK CCFF (Covid Corporate Financing Facility) scheme, which it can draw as per the requirement.
• The Company commenced two new distribution contracts with Daimler in Columbia & JLR in Poland in March 2020 and July 2020, respectively, which expanded the brand’s presence in Europe and Columbia.
• During the period, the Company’s online platforms saw record traffic, and INCH expects the momentum to continue in the near future.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The business operations restarted in thirty countries. The Company focuses on to restructure the costs and expecting around £90 million of savings in Q1 FY21. It would continue to leverage digital investment, using tools that enable a proactive approach to customer engagement. The Company has established the first Daimler and JLR distribution operations, which would benefit the INCH in the long term. Cash generation remains the main focus of the Company, and Inchcape expects the cash conversion in line with the set guidelines, supported by a declining level of capex versus last year data. Overall, the Company prospects look good, and it provides an attractive opportunity to invest in the long term. The stock made a 52-week low and high of GBX 400.20 and GBX 725.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for Inchcape at the current price of GBX 458.97 (as on 5 October 2020, before the market close at 8:28 AM GMT+1) and will recommend fresh buying at the right time. 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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