It’s been a long time since the British had much of a presence in car manufacturing, but when it comes to selling cars, it’s a different story. Paul Hill tips a company well-placed from booming demand for cars in developing countries.
Inchcape (INCH), tipped as a BUY by The Independent
Car retailer Inchcape is cruising ahead in top gear. The UK is its main market, accounting for 25% of profits, but it is well diversified, also selling in Singapore (18%), Hong Kong (9%), Europe (17%), Australia (14%) and emerging markets (9%).
So what’s the key to its success? Firstly, it partners premium brands such as Audi, BMW, Mercedes, Ford, Subaru and Lexus, which appeal to consumers worldwide. Next, after last year’s £263m takeover of European Motor Holdings, the group is realising substantial synergies and divesting non-core marques, such as its UK Vauxhall dealership, which was sold for £14.3m earlier this month. Finally, the proceeds are being redeployed into its rapidly growing overseas units.
With car ownership in developing countries at just 2.8% of the population, compared with 49% in the Western world, there is clearly huge potential. In Russia alone the automotive sector is expected to grow at 25% a year until 2011, which would make it the largest car market in Europe and the fourth biggest globally. This is being driven by rising disposable incomes, the recycling of petrodollars and a greater supply of vehicle finance. And there are rich pickings to be had as profit margins in such areas tend to be double those in the UK.
Another huge opportunity is in China, where car sales are expected to rise by 15% a year over the next three years. Contrast that with the UK, where sales grew at just 2.5% in 2007, which resulted in a profit warning at rival Pendragon, and saw Dixon Motors fall into administration.
According to a December trading update, Inchcape’s “performance continues to be in line with expectations” and the group is “confident about its prospects”. The City expects turnover for 2007 and underlying earnings per share of £6.1bn and 35.6p respectively, on top of a 16p dividend. Despite the tough climate, like-for-like revenue growth accelerated in the fourth quarter to around 3.8% a year, up from 3.3% in the third quarter and 3.1% in the first half. The balance sheet also looks secure, with proforma net debt of about £200m and interest payments eight times covered.
So what do we need to watch out for? Obviously, Inchcape is exposed (albeit less than it once was) to the struggling UK consumer. There are also risks from falling vehicle values, cost pressure from manufacturers and reduced availability of car finance.
Finally, as a global business, most of its turnover is conducted in foreign currency – mainly the euro and the Hong Kong, Singapore and Australian dollars. But if, as I suspect, the pound weakens in 2008, this exposure could actually lift its sterling-reported results.
As such, trading on a 2007 p/e ratio of less than ten and paying a tasty 4.2% dividend yield, Inchcape looks a good value contrarian play. Ken Hanna, a non-executive director, seems to agree – he bought 25,000 shares at 393p in December. Full-year results are due on 26 February.
Recommendation: BUY at 362.75p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments