INCH­CAPE (INCH) 738.5P

Shares - - GREAT IDEAS UPDATES -

A PROSPEC­TIVE PE of 11.3 for Inch­cape, based on

J.P. Mor­gan Cazen­ove’s 65.1p earn­ings per share es­ti­mate for 2018, ap­pears grudg­ing for a multi-brand car dis­trib­u­tor whose global di­ver­si­fi­ca­tion and scale are un­der­ap­pre­ci­ated. J.P. Mor­gan Cazen­ove’s 920p price tar­get im­plies 25% up­side for the share price over the next year.

So why are the shares cheap? Test­ing mar­ket con­di­tions in cer­tain re­gions are weigh­ing on the stock. While the higher mar­gin dis­tri­bu­tion arm is mo­tor­ing, Inch­cape’s re­tail busi­ness is chal­lenged by new car mar­gin pres­sures in the UK and Aus­tralia and a cycli­cal down­turn in the Sin­ga­pore mar­ket.

Deutsche Bank also ex­pects flat 2018 prof­its in ster­ling from Inch­cape, how­ever it is con­tin­u­ing to mo­tor in emerg­ing mar­kets. Inch­cape has also been swept up in the sour­ing of sen­ti­ment to­ward the UK do­mes­tic au­to­mo­tive re­tail sec­tor, un­fairly so given its profit bias to emerg­ing mar­kets.

Myr­iad strengths in­clude long-es­tab­lished part­ner­ships with high-end car brands, among them BMW, As­ton Martin and Mercedes-Benz, and en­trenched dis­tri­bu­tion in de­vel­op­ing mar­kets, which have com­bined to carve out a wide eco­nomic moat.

Earn­ings are di­ver­si­fied across five con­ti­nents and revenue streams span new and used car sales, higher mar­gin after­sales, spare parts, fi­nance and in­sur­ance prod­ucts.

A better sec­ond half of 2018, sup­ported by eas­ier com­par­a­tives, could act as po­ten­tial re-rat­ing cat­a­lyst, so long as growth trends in chal­lenged mar­kets im­prove.

Fur­ther­more, a solid bal­ance sheet and strong cash gen­er­a­tion will en­able Inch­cape to cap­i­talise on a healthy ac­qui­si­tions pipeline, while con­tin­u­ing to fund a pro­gres­sive div­i­dend and a new £100m share buy­back. (JC)

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