BULL POINTS:
■ Exposure to fast growing emerging economies
■ Highly cash generative, net cash in the bank
■ Cost savings of £30m in 2011
■ Focus on premium car brands
BEAR POINTS:
■ Supply chain problems in Japan
■ Weak markets in UK, Europe and Singapore
The retail sector is testing the wits of investors. The companies that you'd expect to do well in tough times - the relatively mature and therefore defensive food retailers or the low-value, high-volume clothing retailers - are struggling. But those exposed to the housing market, like DIY retailers, or to selling high-value one-off purchases, such as cars, are holding their own.
Yet investor sentiment remains hostile to companies in the retail segments that are trading decently, and that is depressing their share ratings. One such group is the motor distributors. They are among the most lowly rated as investors fear the car market will stall now that cash-for-clunkers schemes are over. But the fundamentals for motor distributors are surprisingly attractive.
| IC TIP RATING | |
|---|---|
| Tip style: | Speculative |
| Risk rating: | Medium |
| Timescale: | Long term |
Of London's listed motor retailers, shares in Inchcape are the most highly rated - even though their rating is only in line with the average for retailers - mainly because the group does not rely on the the UK market as much as other car sellers. Although it still makes more than a third of its sales in the UK, which isn't expected to grow much in 2011, much of the remainder comes from fast-growing markets. The best of these in 2010 were Russia and Australia, which are benefiting from the commodity boom, and Hong Kong, where the market grew 39 per cent. In all, Inchcape has operations in 26 countries, and two-thirds of its profits now come from Asia Pacific and emerging markets.
That meant that sales last year climbed 5.4 per cent, but a high level of fixed costs meant underlying operating profits climbed much faster, up 29 per cent to £225m. Russia is proving particularly important, with rapid sales growth driving a six-fold increase in trading profit. Strength like that meant management upped its forecast for the volume of vehicles it would sell group-wide in 2011 by 10 per cent to 2.2m units.
| ORD PRICE: | 359p | MARKET VALUE: | £ 1.65bn | |
| TOUCH: | 358-359p | 12M HIGH / LOW: | 420p | 235p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 272p | NET CASH: | £97m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 6.26 | 108 | 1.9 | 0.9 |
| 2009 | 5.58 | 137 | 22.9 | nil |
| 2010 | 5.89 | 192 | 27.9 | 6.6 |
| 2011* | 5.92 | 227 | 33.7 | 12.0 |
| 2012* | 6.17 | 249 | 36.9 | 13.4 |
| % change | +4 | +9 | +9 | +12 |
NMS: 10,000 Matched Bargain Trading BETA: 1.8 *Espirito Santo forecasts | ||||
Inchcape also plans to increase its presence in China, which surpassed the US to become the world's largest car market in 2009. The group wants to have 20 sites in the country by 2016, compared with four currently, at an investment of £10m per site. That may seem like a pedestrian rate of expansion, and certainly China won't be a material driver of profits for some time. But it's a sensible approach, given the competitive nature of the Chinese car market.
Cautious expansion is one reason why Inchcape finished last year with a higher-than-expected net cash. But it will step up investment this year to build capacity in growth markets. However, strong cash generation has enabled Inchcape to resume dividend payments, and the pay-out is expected to rise sharply.
As well as the attractive geographic mix that underpins Inchcape's prospects, the group's focus on premium marques is also helping to shield it from the economic pressure that afflicts the volume car sellers. Its brands include the likes of Jaguar and Mercedes as well as the so-called 'premium-volume' brands, such as Volkswagen and Audi. Demand for these has held up and they tend to be more profitable for distributors anyway.
