Questor: buy Inchcape, which the market sees as a retailer but is actually a great deal more

Richard Evans 11 July 2018 • 7:18am

Jaguar E-Pace 2017 — Jaguar is one of the car makers with which Inchcape has a relationship

The benefits of spotting a great stock are somewhat undermined if everyone else has spotted it too – what investors really want is a superb business that the market has overlooked for some reason.

One such “under the radar” company, according to one respected fund manager, is Inchcape, the car distributor.

“Many investors see it as a bog-standard car dealership with low margins and low barriers to entry but there is much more to it than that,” said Steve Davies, who runs the Jupiter UK Growth fund.

He said the company, which operates in many markets around the world, had built up long-term relationships with car makers and carried out many key operational tasks on their behalf.

“Its car manufacturing partners, which include Toyota, Jaguar Land Rover, Subaru, Mercedes, Volkswagen and BMW, rely on Inchcape to run functions such as logistics, marketing, the management of dealerships and parts distribution, as well as help with planning future models, in markets where the makers don’t want to do those things themselves,” Davies said.

“Toyota, say, has limited capital so is better off using someone else’s to build the infrastructure required in smaller countries. It is a genuine partnership, not a case of ‘I win, you lose’.”

He said such long relationships – 51 years in the case of Toyota – amounted to big barriers to entry for potential competitors.

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The firm now focuses on high-growth emerging markets such as Latin America but uses its presence in Britain, which has a well developed and sophisticated car market, as a source of best practice to deploy elsewhere, Davies said. Car markets in countries such as Colombia and Peru are growing by 5pc annually, he added. Inchcape is the biggest player in this area of the market but has only a 1pc share.

Part of its strategy under Stefan Bomhard, its newish chief executive, is to buy small family-run dealerships in such countries. These takeovers often need the approval of the car maker concerned so prices tend to be reasonable.

One of the advantages of the focus on emerging economies is that disruption from electric cars is likely to arrive later there.

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Financially, the firm keeps working capital requirements low by avoiding direct ownership of its stock. Capital expenditure is a relatively modest £75m a year. It tends to be paid for the overall service it provides to the car makers rather than just for sales. “This is a cash-generative model,” Davies said.

Despite all these advantages, Inchcape shares trade at a price-to-earnings ratio of about 12. “It’s pretty cheap, almost on a par with UK retail stocks, because people can’t work out whether it’s a retailer or a support services firm,” he added. “It’s one of the long-term holdings in my fund.”

Questor says: buy

Ticker: INCH

Share price at close: 797p

Update: Staffline

Shares in Staffline, the recruitment business, have gone up then down since we first tipped them in February last year; currently we have made a paper loss of about 2pc.

The company has faced some challenges in that time. The founder, Andy Hogarth, stepped down as chief executive in January and has sold a large part of his holding in the firm. Meanwhile, the Government has changed the way in which it structures its “employability” schemes, the management of which is one of Staffline’s two core businesses.

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But Ken Wotton, who holds the shares in his Wood Street Microcap fund, said these developments had not affected his belief in the stock.

“Andy’s departure was not a surprise and succession planning was good – the former finance director is now in charge,” he said. “The employability side of the business is in something of a hiatus but ultimately the new structure, which involves a larger number of smaller contracts, could be better for Staffline.

“Overall, the firm is in a position to grow earnings when the employability business is past the current uncertainty and those earnings may be of higher quality. This could see the current low earnings multiple of about eight improve too.”

Questor says: hold

Ticker: STAF

Share price at close: £10.60