Jefferies International gave a lift to shares in Inchcape PLC (LON:INCH) on Tuesday as it started coverage on the international car dealership group with a ‘buy’ rating and 845p target price, offering around 35% upside potential.
In a note to clients, analysts at the US broker said: “Inchcape's low valuation does not represent its repositioned business, strong cash flow and potential for upgrades, in our view.”
READ: Inchcape full-year profit drops as sales hit by stricter emissions rules, challenging retail market
They added: “After a period of estimate resetting we now expect Inchcape to positively re-rate from depressed valuation multiples (9.4% free cash flow yield; 10.3x PE; 5.7x EV/EBITDA; 4.4% dividend yield).”
Jefferies' analysts said they expect that the FTSE 250-listed firm will apply material surplus cash flow to M&A or share buy backs which could drive upgrades.
They pointed out that Inchcape now proactively seeks M&A targets and has completed eight distribution deals and two distribution acquisitions in the last few years.
The analysts added: “We estimate £0.9bn-£1.0bn of cumulative acquisition or share buyback firepower is possible over the next three years (end FY21E, assuming 1x net debt/EBITDA), with implied 23% (M&A) to 48% (buy back) EPS accretion.”
In late morning trading, Inchcape shares were 0.3% higher at 617p.