Shares in Inchcape PLC (LSE:INCH), the car distributor, rose almost 4% after UBS began coverage with a bullish rating and punchy valuation.
It kicked off with a “buy” and a price target of 920p, implying nearly 40% upside from the current 687.5p (up 25p on the day).
The pitch is straightforward: this is a dull but dependable distribution machine, trading on less than eight times earnings and paying a healthy stream of cash back to investors.
Inchcape does not make cars. Instead, it sits between manufacturers and dealers, handling the less glamorous logistics of importing, marketing and distributing vehicles.
That role has proved resilient through the ups and downs of car markets.
UBS points out that Inchcape’s sales volumes have consistently grown faster than the underlying markets, helped by a steady stream of contract wins with carmakers keen to outsource.
Since 2021, it has picked up 44 such contracts, many of which are not yet fully contributing to revenues.
A new UBS dataset, tracking around 80% of Inchcape’s volumes, suggests the company has managed organic growth of just over 5% a year over the past decade, compared with 3% for the wider markets.
Short-term trading has been trickier, with first-half revenues down nearly 4%, but the bank sees signs of a second-half recovery.
Margins are another concern for investors, especially given pressure on carmakers themselves. UBS is more sanguine.
It forecasts earnings before interest, tax and amortisation margins holding at about 6%, enough to generate £315 million of free cash flow a year.
That in turn could support dividends yielding 5%, annual share buybacks of about £100 million and still leave scope for small acquisitions.
The valuation is what seals the case. Inchcape shares have de-rated over the past year and now trade on a discount of about 30% to their long-term average.
UBS argues that the market is wrongly pricing in declining profits, whereas it expects steady growth of about 5% a year between now and 2029. If correct, that could make Inchcape’s stock look mispriced.