- Derco integration progressing well
- Free cash flow conversion on the rise
The share price fall that accompanied the release of Inchcape’s (INCH) full-year figures had less to do with financial performance than it did with market anxieties linked to the automotive sales market in 2024. Admittedly, management did dampen expectations, cautiously highlighting “prudent expectations for recovery in FY2024 in certain markets, which are weaker than previous years”. This is far from a damning indictment of the industry, especially given that UK new car registrations hit a 20-year high in February, but analysts at Auto Trader (AUTO) believe that significant discounting will remain a feature of the market in 2024.
Inchcape’s performance certainly belies the market reaction on results day. The group delivered 12 per cent organic revenue growth, alongside a 35 per cent hike in adjusted profits to £502mn. Reported earnings aligned with consensus forecasts and management felt able to hike the annual dividend by 18 per cent.
Regardless of the positive financial metrics, you’re left with the impression that Inchcape is intent on tailoring its business model in expectation of industry change. Little further detail was provided on the review of its UK retail business, following on from the January revelation that it was considering a possible sale of the arm.
The integration of the Derco acquisition has proceeded smoothly, significantly deepening Inchcape’s footprint in the fast-growth Americas region. Doubtless other M&A opportunities will arise in a highly fragmented market, although management reiterated that the focus was on deleveraging, yet the related multiple of 0.8 times cash profits doesn’t appear overly burdensome. Encouragingly, free cash flow conversion came in four percentage points ahead of the upper end of guidance at 74 per cent.
The rating doesn’t appear overly stretched at seven times consensus earnings, but we remain on the sidelines given wider industry uncertainties. Hold.
Last IC view: Hold, 857p, 27 Jul 2023
| INCHCAPE (INCH) | ||||
| ORD PRICE: | 601p | MARKET VALUE: | £2.48bn | |
| TOUCH: | 600-604p | 12-MONTH HIGH: | 923p | LOW: 599p |
| DIVIDEND YIELD: | 5.6% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 368p* | NET DEBT: | 68% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2019 | 9.38 | 402 | 79.0 | 26.8 |
| 2020 | 6.84 | -130 | -36.0 | 6.90 |
| 2021 | 7.64 | 149 | 20.3 | 22.5 |
| 2022 | 8.13 | 333 | 61.1 | 28.8 |
| 2023 | 11.4 | 413 | 65.6 | 33.9 |
| % change | +41 | +24 | +7 | +18 |
| Ex-div: | 02 May | |||
| Payment: | 17 Jun | |||
| * Includes intangible assets of £1.27bn, or 308p per share | ||||
