Jefferies starts Inchcape at 'buy', expects shares to positively re-rate
Jefferies initiated coverage on shares of car retailer Inchcape at 'buy' with an 845p price target on Tuesday, arguing that the "undervalued" distributor could drive upgrades by applying material surplus cash flow to M&A or share buybacks.
FTSE 250
19,391.30
17:09 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
General Retailers
3,864.64
17:09 19/04/24
Inchcape
726.00p
16:45 19/04/24
"Inchcape's valuation does not represent its repositioned business, strong cash flow and potential for upgrades," it said. "After a period of estimate resetting we now expect Inchcape to positive re-rate from depressed valuation multiples."
The US bank pointed out that Inchcape proactively seeks M&A targets and has completed eight distribution deals and two distribution acquisitions in the last few years. It estimated £0.9bn-£1bn of cumulative acquisition or share buyback firepower is possible over the next three years, with implied 23% to 48% earnings per share accretion.
Jefferies said it sees a sustainable role for automotive distributors, especially those focused on small and medium-sized markets.
"Inchcape is reshaping to address the opportunity with profitability increasingly weighted towards higher-margin, higher-return distribution, away from lower-margin, lower-return retail (93% of profits from distribution versus 71% in FY14).
"We see a greater understanding of the new shape as a key valuation re-rating driver."
At 1300 BST, the shares were up 0.4% at 617.50p.