A look under Inchcape’s bonnet
It is a retailer, on impossibly low margins, with falling sales, hopelessly nailed to the health of the global economy, refinanced by a deeply discounted rights issue last year — and it isn’t paying a dividend.
So, would you buy a used share certificate from Inchcape?
Motor retailing is a peculiar market at the best of times and none more so than at present. Without state subsidies in the past year — the incentive scheme we know as scrappage — many car dealers would probably have no business left to run. After last year’s cash-call, André Lacroix, Inchcape’s chief executive, not so much wielded the knife as taken a blowtorch to costs.
One year on, Inchcape remains profitable in the teeth of its worst-ever recession. Overheads fell £600 million to £4.7 billion, but sales fell even faster — down £675 million to £5.6 billion. Taking in the financing charges, profit before tax dropped 20 per cent to £155 million.
What investors need to calculate is what capacity for growth does Inchcape have? Unlike other London-listed motor dealers, it is truly global, with operations in Belgium and Greece, Australia, Hong Kong and Singapore, and nascent businesses in emerging markets such as Russia. There are many moving parts. In the UK, its largest territory, life post-scrappage (the £2,000-off deals end this month) is uncertain. Margins are terminally thin — 2 per cent last year — but there are signs that used car prices are recovering, as are the sales of higher-margin upmarket marques. Countering that, Inchcape is exposed here and elsewhere to Toyota and the effect on consumer sentiment of the Japanese manufacturers’ multiple recalls.
Mr Lacroix’s thoughts on Inchcape’s prospects are worth heeding: “We remain cautious for 2010 and do not expect a global recovery to start until well into the second half of this year, given consumer confidence is still weak and unemployment continues to rise in many of our key markets.”
Joint broker Investec — which is not pencilling-in a dividend for the foreseeable future — believes that Inchcape’s pre-tax profits will rise to £165 million this year, putting the shares on a multiple of just over 11 times. That feels a little rich for a motor retailer. Even if you applied it to Investec’s ambitious earnings target of £215 million pre-tax in 2012, that only gets us to a longer-term share price of about 35p. Is that enough upside for a share which, when it was at 26½p eight months ago, Tempus concluded was certainly high enough? At 28¼p, pass.
Melrose
No one does it quite like the chaps from Melrose. David Roper and Christopher Miller — respectively, chief executive and chairman — are the last of a breed whose totems in the 1980s were Lords Hanson and White, corporate raiders who built conglomerates and bought and sold businesses with the explicit aim of making money for shareholders.
What these two latter-day buccaneers do, if you like, is play the corporate concertina. Raise money to buy industrial businesses — good ones, they say, but which have been poorly managed — improve them and expand. And then they shrink, selling the businesses off at a profit.
What that has meant for investors — and they have a loyal following — is dipping into their own pockets to fund acquisitions, getting dividends back as the businesses perform, receiving special payouts when those businesses are sold on, and then reinvesting again when Messrs Roper and Miller have identified the next target. And so it goes on. They did this at Wassall in the 1990s and are doing it again at Melrose this decade.
After the acquisition of FKI in 2008, Melrose is now a £1.3 billion turnover engineering conglomerate in generators, lifting and cable equipment, zinc casting and half a dozen other industrial niches. Last year’s sales were up 45 per cent, headline profits leapt 60 per cent to £118 million, net debt was reduced by £221 million to £321 million and dividends rose 10 per cent.
Mr Roper is not at present a seller. “It is a buyer’s market, not a seller’s,” he says. “Our institutional shareholders are telling us: ‘Why sell businesses when you can improve profits significantly in the next 18 months and sell them then?’ ” But there are plenty of opportunities to buy, he says, possibly among industrial companies in private equity hands that may have been re-engineered financially, but not operationally.
More than any other, Melrose is a stock you back for the management. Are they dinosaurs of a bygone age or a highly repeatable success story?
This column is firmly in the latter camp — which is why it advised “buy” last March at 66p. At 207¼p, up 14p, or ten times 2010 earnings, and yielding 3.7 per cent, stick around for the next big deal.
Chime
Yesterday’s results from Chime Communications needed no spin. The public relations and advertising agency filed record full-year figures, with sales, operating profits and dividends all up 10 per cent. That performance may surprise, given the dire performance of small-cap media agencies after the post-2001 downturn. This time, however, Chime has no debt — it reported net cash of £4.8 million. It has also become more flexible on costs, with 16 per cent of its overheads now classed as variable — largely through the adoption of profit-related pay. The greater achievement is that Chime has grown when its sector has not: underlying revenues rose 8 per cent. In PR, they gained 9 per cent in a market that shrunk 5 per cent. In advertising — where Chime’s VCCP is to blame for comparethemarket’s meerkat campaign — revenues rose 10 per cent, against a 12 per cent fall at its peers. True, Chime’s research division was down 17 per cent, but new management is now in place.
If there are concerns it is that two clients — one is O2, the other undisclosed — speak for nearly a quarter of sales, and that one third are drawn from the public sector. But only 3 per cent come from the UK Government, much of the rest from far better-funded states — especially in the Gulf, where Chime works for Abu Dhabi, Bahrain and Qatar.
WPP still sits on a 16 per cent stake and is likely to mop up the remainder at some point. The puzzle is why it didn’t a year ago, when the shares crashed to 38p. Even so, at 209½p, or less than ten times earnings — and the benefits of three recently completed acquisitions yet to flow through — this is a stock to buy on weakness.
Nick Hasell, The Times 11-03-2010
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