VALUE INVESTING
Inchcape: The Asset Stripper's Value Target

By Stephen Bland (TMFPyad)
April 6, 2001

Inchcape (LSE: INCH) (http://www.inchcape.com/) is an international distributor of motor vehicles. Don't need to know much more about what it does, do you? That would be overanalysing.

I like this one. In fact I liked it so much that I bought the company, well a bit of it anyway.

Here are the fundamentals.

• Share price 349p
• 52 week high/low 400/225
• 5 year high/low 1842/225
• Market capitalisation £288m
• Earnings per share year ended 31/12/00 62.1p normalised
• Earnings per share forecast y/e 31/12/01 60.4p (most recent)
• Earnings per share forecast y/e 31/12/02 65.1p (most recent)
• P/E historical 5.6; on 2001 forecast 5.8; on 2002 forecast 5.4
• Yield on actual 2000 dividend 6.3%; on 2001 forecast 6.6%
• Price/Tangible Book 0.9 (based on 392p NAV at 30/06/00 interim)
• Gearing 46.5% at 31/12/99 but see comment below
• One year relative strength +60%
• Directors own 0.1%, other majors 38%

This share is very cheap as can be seen. The question for value players of course is whether there is anything present to out the value. A lot of value shares are not the real thing because there is no "outer": they simply are cheap and remain cheap. Not good enough.

A couple of points on the data above. Firstly, gearing. The company still has some debt but is going through a radical process of selling off subsidiaries, raising a lot of cash by doing so. As a result the management stated recently that there will be a net cash situation in the near future. Secondly the earnings per share figures will be boosted by the share buyback to which I refer below. That is why I have used only the latest forecast and even that was made before the full scale of the buyback would have been known.

The cash realised is being used in a number of ways apart from reducing debt. A lot of money has been spent recently in buying up their own shares. As far as I can tell they have bought in some 6.9% of their issued shares over the last few weeks at a cost of some £20m. A very large proportion by the standards of most buybacks. Also they have suggested that a return of some 50p per share to shareholders may be made after the AGM to be held in May, which would cost a further £40m or so.

Some very interesting things have been going on at Inchcape. A lot of the corporate activity mentioned has almost certainly been spurred by the presence of Sir Ron Brierley's Guinness Peat Group as the major shareholder with about 16%. Sir Ron is one of the old school asset strippers still left, the sort of guy I would have admired thirty-odd years ago when as a spotty little git of an accountant, I first learned to distinguish a value share from a hole in the ground. GPG make no secret of their intentions and have indicated that they wish to bust up the company, putting a breakup value of around 500p on the shares. The Inchcape board are fighting the proposals, and one of their weapons has been the restructuring  which involves all the disposals.

This share is all but a pyad share. It appears to qualify on each of the four cornerstones of the acronym -- Price, Yield, Assets and Debt. It has a half-decent sounding name. What is an inchcape? Perhaps a raincoat for midgets. It does not have a decent EPS forecast rise though, necessary under normal circumstances for the perfect value play. EPS is in fact set to fall slightly in 2001. So this is clearly not an EPS outer. The outer here is much more the potential 500p break up value. And it has a good yield whilst waiting. I do think that the P/E is very low, even taking into account the flattish EPS picture.

Whether the share price will rise to approach the theoretical value proposed by Sir Ron is probably the greatest risk from a short-term value player's viewpoint. The downside is interesting and perhaps a bit worse than the ultra low P/E and high yield might normally indicate. I say this because the shares have risen very strongly over the last year up to a recent high of 400 but have since fallen back about 13%. I expect that the GPG influence is largely the reason for the rise, thus creating a special factor which if removed might cause a larger then expected fall for a low P/E share. That is a risk I am prepared to take.

Apart from that, a further risk is that the share is seriously bongo -- a term used by some on the value board to mean that it has extensive interests around the world, but more than that, the point is that this is seen as increasing the risk. Well, it is by me anyway. Geographical diversification is seen as beneficial by a lot of normal investors. But I'm not a normal investor. For me, a company going outside the M25 immediately introduces added risk factors which ideally I can do without.

More: Value investing discussion board | Inchcape discussion board

The author holds shares in Inchcape.