View from City Road: Inchcape remains good value

CHARLES MACKAY, Inchcape's chief executive, was one of the first industrialists to welcome the rise in the value of the dollar yesterday. With half the company's profits in dollars or dollar-related currencies, its strengthening came as a relief.

In the first half, when the company made better-than-expected profits of pounds 117m before tax, the results were translated at an average rate of just below dollars 1.80, slightly higher than in the first half of 1991. But the second half faces a significant dollar penalty.

The dollar's bounce gave new impetus to the shares, which rose 22p to 420p. Despite underperforming over the summer, as the American currency's weakness took its toll, Inchcape's shares have beaten the rest of the market by 20 per cent over the past year.

Will they continue to outperform? Much depends on whether UK recovery stocks return to favour. Inchcape makes 80 per cent of its profits overseas, with Hong Kong, China and a host of expanding Asian countries accounting for about 45 per cent of the total. A UK recovery would have to be extraordinarily sharp to exceed the regular growth of these markets.

But sentiment will be affected by the emergence on 16 December of the first Carina E from Toyota's Derbyshire factory, which will initially increase supply by 31,000, rising to 100,000 by 1995. Given its long- standing relationship with Toyota, Inchcape expects the lion's shares of these extra cars, which it will supply to the UK, Belgium, Luxembourg and Greece.

This will serve to highlight the company's exposure to the motor trade - 58 per cent of profits in the first half - and to Europe, including the UK - 40 per cent of profits. Both exposures have been boosted by the acquisition earlier this year of TKM, which contributed about pounds 19m to operating profits.

Despite slight disappointment over a pounds 70m provision for TKM, the company's record on acquisitions is good. Both it and the smaller purchase of Spinneys, in the Middle East, boosted earnings, helping them to rise by 1p a share to 14.6p a share, despite a lower contribution from insurance broking. Further acquisitions are planned, although the company went out to assure investors that it would not overpay.

The shares, helped by a recovering dollar and unusual Far East exposure, continue to look good value, backed by an increase in the interim payout to 5.4p a share.

(Photograph omitted)