Inchcape — Acceleration in FY23 but more cautious FY24

Research: Consumer

Inchcape — Acceleration in FY23 but more cautious FY24

Inchcape’s (INCH’s) FY23 results highlighted strong revenue and margin progression, with 12% organic revenue growth and a 70bp uptick in adjusted operating margin, leading to 18% EPS growth. The Derco acquisition contributed its full first year, helping to boost profits despite margin compression in the Americas and Retail. INCH anticipates another year of growth in FY24, although with caution due to expected softness in certain markets, particularly Europe and Retail. INCH will continue its disciplined approach to capital allocation as it deleverages the balance sheet, and recently announced a strategic review of its UK Retail business.

Written by

Milo Bussell

Analyst, Consumer and TMT

Consumer

Inchcape

Acceleration in FY23 but more cautious FY24

Automotive retail

QuickView

12 March 2024

Price

643p

Market cap

£2,663m

Share price graph

Share details

Code

INCH

Listing

LSE

Shares in issue

413m

Business description

Inchcape is a leading global automotive distributor, operating across six continents with 22,000 employees. The company has two market channels, Distribution (79% of FY23 revenue) and Retail (21% of FY23 revenue). Its brand partners include Toyota, Jaguar Land Rover, Suzuki, Mercedes-Benz, VW Group, BMW Group and Subaru.

Bull

Inchcape has a leading position in many of its markets and is exposed to high-growth geographies such as Africa.

The company’s brand partners are well-established businesses and strong brands within the automobile industry.

Consistent track record with a robust capital allocation policy.

Bear

The company expects a weaker FY24 in certain markets.

Consumer spending is under pressure because of higher interest rates globally.

Due to its global operations, Inchcape is exposed to fluctuating foreign currency movements.

Analysts

Milo Bussell

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Inchcape’s (INCH’s) FY23 results highlighted strong revenue and margin progression, with 12% organic revenue growth and a 70bp uptick in adjusted operating margin, leading to 18% EPS growth. The Derco acquisition contributed its full first year, helping to boost profits despite margin compression in the Americas and Retail. INCH anticipates another year of growth in FY24, although with caution due to expected softness in certain markets, particularly Europe and Retail. INCH will continue its disciplined approach to capital allocation as it deleverages the balance sheet, and recently announced a strategic review of its UK Retail business.

Robust FY23 results

INCH delivered a strong financial performance in FY23, with double-digit organic revenue growth of 12%. On a reported basis, revenue was boosted due to the Derco acquisition, up 41% to £11.4bn. The focus on Distribution, alongside the benefits from Derco as well as the organic revenue growth and operational leverage, resulted in improved levels of adjusted EBIT at £669m (FY22: £411m), at a margin of 5.8% (FY22: 5.1%). Adjusted basic EPS grew 18% to 84.8p, which allowed for an equivalent increase in the dividend to 33.9p, reflecting the company’s targeted 40% payout ratio. Adjusted net debt increased to £601m (FY22: £378m), mainly relating to Derco and three acquisitions in Asia-Pacific, reflecting leverage of 0.8x. Given the proximity to the company’s self-imposed leverage limit of 1.0x, deleveraging the balance sheet will be a priority focus in the short term.

Distribution excellence driving contract wins

FY23 highlighted INCH’s continued position as the leading global distribution partner for automobile manufacturers, through its asset-light and digitally-enabled approach. The group won 15 new contracts across geographies, while the Derco acquisition secured INCH’s leading position in Latin America. Looking to FY24, its Distribution Excellence strategy is expected to drive top-line, profitable growth. Regarding Vehicle Lifecycle Services, management flagged it would reduce the bravoauto business to its ‘profitable core’ to enable a more focused approach.

Valuation: Discount to wider peers

INCH trades on P/E multiples of 7.4x for FY24 and 6.7x for FY25, corresponding to discounts of 34% and 44% to the median of its UK distributor and automotive retail peers. Although the company is expected to deliver better margins in both years than most peers, it is also forecast to see slower growth of 2.4%, reflecting management’s more cautious outlook in certain markets.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

8,133.7

373.2

72.0

28.8

8.9

4.5

12/23

11,447.0

502.0

84.8

33.9

7.6

5.3

12/24e

11,722.8

524.1

86.9

35.9

7.4

5.6

12/25e

12,173.3

579.0

95.4

39.6

6.7

6.2

Source: LSEG (Note: Priced at 12 March 2024)

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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