Bottom Line: Inchcape achievement understated

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The Independent Online
TAKE your pick. Inchcape's profits rose by either 36 or 28 per cent. More to the point, its earnings rose by either 18 or 4 per cent. Did Inchcape impress or disappoint?

The answer depends on whether you use old or new-style accounting rules. Under the former, which Inchcape calls 'normalised', profits were pounds 252m, against pounds 250m under FRS3, and earnings were 31.6p, against 31p under FRS3. The new rules required Inchcape to put its 1991 profits on the sale of its tea business above the line.

The reality, however, is that both results understated Inchcape's achievement. This is because it included in its normalised profit gains on the sale of properties - even though they fell by pounds 1.7m - and the results of discontinued businesses, which swung by pounds 2.4m to losses of pounds 1.8m. Stripping these out to give the results of the continuing operations suggests earnings rose by more than 20 per cent. Against this background, the 17 per cent dividend rise to 13.75p a share looks reasonable, whereas it looks ludicrous against FRS3 earnings.

If earnings grow at the same underlying rate this year, the shares at 599p, down 2p, are trading on 16 times prospective earnings.

The underlying results reflected growth both at TKM, acquired last year, and its existing car distribution business. Other businesses, except shipping services, also increased their contribution. Shipping suffered a 36 per cent increase in turnover and associated financing costs, but a 16 per cent decline in profits. Charles Mackay, chief executive, said this reflected acquisitions - in ship broking - and a fall in Japan.

One worry might be that a large part of the profits rise came from associates and minorities rather than wholly owned subsidiaries. These include 40 per cent of Mazda in the UK and 50 per cent of the profits of Proton in the UK. But these companies all have a strong record, so they should not detract from the quality of Inchcape's earnings.

This year should see further growth in motors - boosted by a full year's output from Toyota's factory in Derbyshire - and continued growth in the Far East, helped by the rise in the value of the dollar.

If these are not good enough reasons for buying the shares on a market multiple, the company's acquisition record should be. So far this year it has bought businesses in Oman, Finland, Switzerland and Ecuador. In all these cases as well as the larger purchases it has paid less than 10 times earnings. It seems to have a knack of finding lowly valued companies, so should be able to boost earnings per share without difficulty.

Gearing doubled last year, largely thanks to the TKM acquisition. But cash flow should be sufficient to pay for some further small purchases. And if the company has to issue shares to fund a larger one, shareholders should be supportive, given the record.

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