Eight years ago Inchcape set out plans to become an automotive distributor in hard-to-reach markets, yet many investors still regard the FTSE 250 business as a straightforward car dealer.
The company decided to move away from retail operations and disposed of a number of its British dealerships so that it could focus on providing a range of services designed to maximise profits from every new car sold in the markets neglected by the large car manufacturers.
Inchcape’s distribution business works with manufacturers such as Jaguar Land Rover, Mercedes-Benz and the BMW Group to sell their models and to advise on all aspects of the sales process, including marketing and logistics. The car specialist also has exclusive distribution deals to sell those cars and their parts in a number of different global markets. The number of registered cars in many of these markets, such as the Caribbean, Indonesia and Guatemala, typically is less than a million per year, providing plenty of scope for sales growth.
Car dealers can secure a mark-up on the price only of the vehicle itself, but Inchape has been capturing whole supply chains with its exclusive distribution rights for car brands in a number of countries. It has estimated that the number of vehicles sold every year in these harder-to-reach jurisdictions is 17 million. The company will import cars into these markets and will distribute the vehicles, while its control of the supply chain provides scope for driving efficiencies. Its distribution business therefore offers far higher margins than pure retailing andInchcape sees room for growth as its share of its chosen markets sits at about 2 per cent.
Meanwhile, the business’s so-called after-sales division helps to generate repeat income from every car imported and sold in a particular jurisdiction, and these operations provide a helpful buffer from any downturn in car retail income. Inchcape estimates that it captures only about 25 per cent of the possible profit that it could derive from every car imported into these markets.
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It think there is an opportunity for generating income from the onward sale of a vehicle, the commissions on financing and insurance products, as well as repair work, as a car may have at least four different owners before it is sent to the scrapyard. Inchape’s board has estimated that these sales could drive incremental profit of £50 million by 2026 and Peel Hunt, the broker, thinks these earnings down the road are not yet fully appreciated by the market.
Inchcape is set to publish its full-year figures next Tuesday and any additional detail on this segment could help the company’s shares if it is well-received by analysts and investors.
Inchcape’s income mix, therefore, has shifted substantially since it launched its “Ignite” strategy in 2016. The company has increased the slice of its revenues from distribution activities from 43 per cent to 72 per cent and its retail sales fell from 57 per cent to 28 per cent of overall income between 2016 and 2022.
Bankers at Rothschilds have been brought in to sound out buyers for Inchape’s retail division in the UK as the company seeks to demonstrate its commitment to its higher-margin income streams.
However, Inchcape has faced setbacks in its shift to services. It pressed ahead with a huge expansion in Latin America with the completion of its acquisition of Derco for £1.3 billion in January 2023. The Santiago-based company is the leading car distributor in Chile, Peru and Bolivia, but the deal immediately soured after a decline in Chilean car sales.
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Chile had delivered a record year of car sales in the year of the acquisition, but then the market dropped steeply, with volumes down by as much as 30 per cent. Inchcape’s investors feared the company wouldn’t be able to clear the high level of inventory acquired in the Derco deal. Yet its management still reduced inventory without dramatic price cuts and the business has gained market share. It is now positioned to benefit from Chile’s recovery.
Inchcape’s market value could be set to rise if its bet on longer-term services revenue pays off and the Derco deal plays out better than anticipated. More broadly, investors still largely see the company as a retailer, even though it derived a mere 11 per cent of its profits from retail in 2022. Analysts at Numis and Peel Hunt have picked the stock as one of their best bets for the year ahead amid hopes for a re-rating of its shares.
Advice Buy
Why Investors are yet to appreciate the profits Inchcape could derive as it retreats from car retailing
The Renewables Infrastructure Group
Renewable energy funds are struggling to adjust to the whirlwind ratcheting-up of interest rates — and if you want evidence of that, just take a look at the whacking discount attached to The Renewables Infrastructure Group, or Trig, as it is better known (Emma Powell writes).
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The shares are priced 22 per cent lower than the investment trust’s net asset value, an indication that investors are not convinced that the markdown in valuations is sufficient, given a higher cost of capital.
The discount rate used to value its assets, which span wind, solar and battery storage, rose to 8.1 per cent, from 7.2 per cent, which contributed towards a reduction in the NAV to 128p a share, from 135p at the end of 2022. And that’s not all. Electricity prices, which are linked to wholesale gas prices, have fallen substantially since the end of last year. Forward power prices between this year and 2026 have reduced by 20 per cent. For context, a 10 per cent reduction in power prices would reduce the NAV by 2.2p a share over a five-year period.
It means cashflows from the business are expected to fall over the next two years after a boom in energy prices since the outbreak of the war in Ukraine. That did not stop Trig raising the target dividend for this year to 7.47p a share, from 7.18p last year. The level of cash covering the dividend is likely to fall, from a healthy-enough multiple of 1.6 last year, after the company repaid more than £200 million in debt.
The revolving debt facility is £360 million drawn, a position that InfraRed, Trig’s investment manager, aims to reduce to below £150 million, which relies on disposals, less of an easy feat in a renewables market that is under greater scrutiny.
At the existing price, that leaves the shares offering a potential dividend yield of 7.4 per cent, which looks pretty generous even when the bar for what constitutes decent income for investors has been raised in light of higher interest rates. The trade-off is security.
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Advice Hold
Why? A high dividend but with less cash coverage
