Since this column last looked at Inchcape in February, the company has struck a deal to sell its British car showrooms for £346 million. As that has been a key part of the business since it started concentrating on the motor trade in 1999, this marks a clear break with the past and the start of a new chapter.
In future it will focus on its more lucrative distribution business, working between manufacturers, retailers and other vehicle stockists in product planning, logistics and after-sales services. As retail accounted for 18 per cent of revenue but only 7 per cent of profits last year, there will be a boost to group profit through higher profit margins, lower capital requirements, higher returns and stronger cash generation. In theory, at least, all that should be reflected in the share price at some stage.
UK retail will not finally be cut asunder for several months, so the full impact will not hit the bottom line until 2026. In addition, the group will keep odd spots of retailing elsewhere in the world, where appropriate. “This simplifies our business and represents a compelling opportunity to deliver meaningful returns to our shareholders,” according to Duncan Tait, its chief executive.
The retail withdrawal is a logical consequence of the group’s transformative 2022 purchase of Derco, Latin America’s largest auto distributor, for £1.3 billion. That added £2 billion a year to turnover, helping to take total revenue up by £3.3 billion to £11.4 billion last year and the yearly dividend 5.1p higher to 33.9p. The market there was depressed last year but has stabilised since, while the group is expected to take out £50 million of costs from Derco this year, on top of £21 million in 2023.
With customers including Chrysler, Dodge, Ford, Jaguar, Jeep and Mercedes, the shift toward electric and self-drive vehicles means that manufacturers expect increasing knowhow from distributors, which are expected to have advanced digital and data capabilities, a global presence and fingers on the pulse of local markets. This gives the likes of Inchcape a privileged position between factories and motorists, one that eventually may tempt one of the big carmakers to forge even closer links.
Largely because of its historic role as an arm of the British empire, Inchcape operates mainly in Europe, Africa, Asia and South and Central America, steering clear of the United States, where the market is already sewn up. The main regions each account for roughly similar amounts of Inchcape’s revenue, but Asia and the Americas are more profitable than Europe and Africa. We should learn more at the company’s capital markets event on May 23, an opportunity to correct any misapprehensions and to put flesh on the bones of the new strategy.
Peel Hunt, the investment bank and a house broker, predicts £510 million of pre-tax profit for this year, including £36 million from UK retail, to give 86.1p earnings per share. That should lay the foundation for £565 million pre-tax profit for 2025, still including £34 million from UK retail, taking earnings per share to 95.2p. Those numbers would give price-earnings ratios of 9.15 and 8.27, respectively, while the dividend yield will be heading to 6 per cent. A £100 million share buyback programme is promised in the next year or so, though investors should remember that two years ago a similar plan was killed off halfway through to help to pay for the Derco deal.
The shares have been in a broad band of 650p to 950p since September 2021. Since we recommended buying at 682p they have made solid progress to the middle of that range. However, there is a potential ceiling: among a swathe of institutions, the biggest individual shareholder is George Horesh, the wealthy car importer, with a 3.7 per cent stake. He caused a wobble in 2021 when he sold eight million shares at 900p.
The shares’ present modest rating means there is still plenty to go for. The retail exit could be the catalyst the bulls have been waiting for, backed by the already strong earnings and dividend.
Advice Buy
Why The company is well placed to exploit the opportunities presented by the exit from retail
IG Design Group
An anonymous building by the A509 in Newport Pagnell, Buckinghamshire, holds the key to one of this year’s more intriguing investment prospects. It houses the headquarters of IG Design, an Aim-listed company that is a world-leading producer of greeting cards, wrapping paper, stationery and gift bags, with millions of customers.
Its business model was wrecked by Covid. Most shops closed, parties were outlawed, paper and shipping costs soared and consumers went on strike. Last year, however, IG hired a new finance director and a new chief executive, Paul Bal, who was fresh from reviving Stock Spirits, one of Europe’s largest booze groups. He has applied basic housekeeping: cutting debt, simplifying the business, exiting lossmaking contracts and improving efficiency.
Last month he announced estimated doubled profits for the year to March, at $26 million. That sent the shares from 120p to nearly 180p. While that is impressive, it leaves a long way to go to the 798p pre-pandemic peak of January 2020.
The company expects to restore profit margins to 4.5 per cent by next March, though that would remain well below the pre-pandemic 7 per cent. Analysts reckon a return to dividends is likely with the 2024-25 results.
Bal, 57, still has a lengthy to-do list. Reasonably enough, part of his plan has been to focus on more profitable outlets such as Walmart, the powerhouse American retailer, inevitably one of IG’s largest customers. However, many IG-sized companies can testify that Walmart is also adept at squeezing margins as the price of access to its coveted shelves.
IG needs a spread of smaller shops where it can dictate terms. It also outsources most of its production, giving it flexibility but uncertainty.
The other important measure, implemented by Bal soon after he arrived, was to nail down finance through a three-year, asset-backed $125 million package with HSBC and NatWest. But a glance at the latest balance sheet shows that IG is far off being back on an even keel. Only sustained trading will achieve that.
Advice Buy
Why Patience should be rewarded
