The Investment Column : Inchcape aims to build from new base

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The Independent Online
Inchcape's decision to dump the pilot, cut the dividend by a third and take a massive write-off is, on the face of it, a classic kitchen sink job. Wiping the slate clean in terms of management and profits always impresses the City and will give the motor distribution to shipping group a new base from which to build. The group will be desperately hoping that yesterday's 8p bounce in the shares to 270p marks a change in sentiment after a near two-thirds underperformance against the rest of the market over the past three years.

But Inchcape is no sprawling conglomerate. The late Sir George Turnbull saw to that when he took the helm in 1984 and transformed a sleepy colonial trading empire into a more focused distribution and services group.

Indeed, dumping the Bain Hogg insurance broking and the laboratory testing businesses will dilute profits in the short term. Brokers suggest it will be lucky to pick up much more than pounds 500m for the pair, which means interest income of less than pounds 40m will replace combined profits of pounds 56.5m last year. Adding insult to injury, insurance and testing were the group's only main divisions to raise returns last year.

Inchcape's problems are much more cyclical, however. Around 40 per cent of sales are dependent on the import of mostly Japanese cars and even their marketing appeal could not cope with the yen's appreciation by around a third over the past three years. The European business seems to have suffered worst, slumping to a pounds 14m loss after an 8 per cent drop in volumes in 1995. But the extent of the problem is illustrated by the fact that in the rest of the world volumes were down 17 per cent, compared with a 19 per cent world-wide increase for other marques.

Whether last year's 36 per cent fall in pre-tax profits to pounds 147m, before the pounds 65.2m restructuring charge, marks the low point remains to be seen. The yen has weakened since last year, but political uncertainty has resulted in sales in Hong Kong, once one of the group's most lucrative markets, diving by between 40 and 60 per cent this year. Toyota and the other big Japanese manufacturers are busy cutting costs and moving production offshore, but it could be another two to three years before the benefits become apparent.

Assuming profits before disposals rise to pounds 165m this year, the shares stand on a premium forward rating of 16. Still unattractive.