The Investment Column: Inchcape motors ahead on emerging market plan

Invensys; Spring Group
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Our view: Buy

Share price: 457.5p (+12.5p)

THE car dealer Inchcape plans to step up its international expansion drive over the coming months. It will focus on emerging markets and should see the group spread its geographic reach from six core countries to ten over the next five years.

At present, Inchcape operates out of the UK, Belgium, Greece, Hong Kong, Singapore and Australia. First half results yesterday showed that business is booming in all territories apart from Singapore and Hong Kong, where trading is sluggish. Pre-tax profits rose 11 per cent to £112m, which beat City forecasts. Given this impressive performance, Inchcape was able to raise its dividend by 56 per cent to 5p per share.

Earlier this year, the car dealer made its foray into the Russian market. It unveiled plans to open two giant Toyota dealerships in Moscow via a partnership with a local entrepreneur, Roman Chaikovskiy. Andre Lacroix, Inchcape's chief executive, said yesterday that China is next on his list of possible new markets. He also indicated that Inchcape would most probably continue its expansion drive via partnerships and joint ventures similar to that in Russia. These provide the company with the local know-how and connections needed to get it established in a new territory.

But corporate action is unlikely to be restricted to emerging markets. Inchcape also plans to play a role in the consolidation of UK car dealers. Mr Lacroix is keen to acquire further dealerships on these shores. His company certainly has the firepower to play a major role in the consolidation of the sector. In the first half of 2006 alone it generated more than £140m of cash, while its balance sheet has little debt, leaving plenty of room for management to borrow sizeable sums for acquisitions.

Profits at Inchcape are expected to hit £200m by the end of 2006. Five years ago they stood at just £60m. This phenomenal performance is reflected in the near-fourfold rise in the value of its shares over this period. Investors can expect the growth to continue for some years.


Our view: Hold

Share price: 18.25p (+0.75p)

Invensys broke into the black for the first time in five years with its full year results in May. Yesterday, there were signs of further progress at the engineer. It posted a 55 per cent rise in first quarter operating profits to £45m, said it had enjoyed a rise in its margin to 7.5 per cent from 5.2 per cent and boasted of a net cash inflow of £8m for the period.

It is truly amazing that Invensys is still around. During the economic downturn that followed the Twin Towers terrorist attack of 11 September 2001, the group came within a whisker of collapse as it struggled under a mountain of debt.

Following May's rights issue, and the slew of disposals that preceded it, borrowings at Invensys are now down to £298m. At the height of its troubles this figure stood at £1.4bln.

Anyone who has held shares of the engineer over the past five years will have lost the bulk of his or her money. In the summer of 2001 the shares traded near 100p. Yesterday, the stock closed at 18.25p. At current levels, Invensys' valuation is in line with that of its peers in the engineering sector and there is no real reason for readers to rush out to buy into the group. However, if you have got the stock it is probably worth holding on to.

Spring Group

Our view: Buy

Share price: 48.75p (+3p)

After a difficult couple of years, Spring Group finally seems to have turned the corner. Interim results from the recruitment group yesterday saw it return to the black to the tune of £2m - a figure which easily beat City expectations. This compares with a loss of £5m during the same period last year.

Spring also announced that it is to part company with its chief executive, Richard Barfield, who is to leave the company next month for family reasons after a six-year spell as an executive director at the recruitment group.

Mr Barfield certainly leaves Spring in better shape than it has been for a good while. The restructuring and reorganisation he pushed through at the end of last year included the closure of loss-making operations and an exit from surplus offices. He has focused the company on higher-margin business while abandoning or renegotiating a number of low-margin contracts.

Four-fifths of Spring's sales come from providing staffing services to the IT sector in the UK. But, despite the tough trading conditions which continue to dog the industry, the group is expected to have notched up a pre-tax profit of £5m by the end of 2006. This leaves Spring trading at around 16 times earnings - pretty much inline with the rest of the sector.

What makes its shares particularly appealing at current levels is the group's cash pile. Around half of Spring's £77m market capitalisation is accounted for by the cash in its balance sheet, limiting the potential downside in the stock.