- Distribution growth outstrips weaker retail revenues
- £256mn loss on disposal of Russian business
Inchcape’s (INCH) detour across the Atlantic is about to accelerate, with a £1.3bn cash-and-share acquisition of a major auto distributor in Latin America. Car dealer Derco – whose footprint includes Chile, Peru, Colombia, and Bolivia – is expected to add roughly £2bn in revenues a year and be 20 per cent accretive to Inchcape’s earnings-per-share from the second year onwards, if the deal passes muster with three countries’ regulators.
Derco would also skew earnings further towards Inchcape’s distribution business – which involves everything from deliveries to marketing and repairs for brands like Mercedes, Porsche and Jaguar – up to three-quarters of total revenues.
This move looks shrewd, since distribution has provided most of the running for growth, and its margins are more than double that of the retail business. Over the six months to the end of June, distribution revenues in Americas and Africa notched up constant currency sales growth of 47 per cent, and added another 34 per cent in Europe, which offset a lockdown-related slump in its largest market of Asia Pacific.
On the other hand, Inchcape’s retail operation, which now owns dealerships in the UK and Poland only, after taking a £256mn loss on the disposal of its top-performing Russian business in 2022, is weakening. Retail sales declined by 1 per cent in the second quarter.
The big question for the second half will be the supply of new cars, constrained by the semiconductor shortage. An “improved outlook for vehicle supply and robust demand” led Inchcape to maintain upgraded pre-tax profit estimates of £350mn-£370mn for the year. However, improved supply could also drive down abnormally high car prices and push retail operating margins down from 2.6 per cent to around 1.5 per cent, while the consumer spending squeeze adds to the uncertainty. Despite a reasonable valuation of 11.4 price-to-forward-earnings, we stay on Hold.
INCHCAPE PLC (INCH) | ||||
ORD PRICE: | 843p | MARKET VALUE: | £ 3.2bn | |
TOUCH: | 839-846 | 12-MONTH HIGH: | 941p | LOW: 615p |
DIVIDEND YIELD: | 2.8% | PE RATIO: | 13 | |
NET ASSET VALUE: | 304p* | NET CASH: | £97.6mn |
Half-year to 30 Jun | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
2021 | 3.59 | 33.1 | -0.20 | 6.40 |
2022 | 3.89 | 188 | 36.2 | 7.50 |
% change | +8 | +322 | - | +17 |
Ex-div: | 04 Aug | |||
Payment: | 02 Sep | |||
*Includes £469mn of intangible assets, or 125p per share |
Last IC View: Hold at 765p, 24 February 2022.