Inchcape: profits prove traditional car dealers are still in the race

The phrase “firing on all cylinders” would apply to car dealers, were it not for growing numbers of electric vehicles on their forecourts. This is a good time for that much-denigrated professional, the car salesperson. They have plenty of new product to promote as big manufacturers pivot into hybrids and EVs. Many customers are awash with spare cash saved during lockdowns

Investors could do worse than kick the tyres of car sales businesses. Citing strong demand and resilient margins, UK distributor Inchcape said on Friday that this year’s pre-tax profits would beat market expectations of £216m. Shares trading at a steep discount to more fashionable peers are just one reason for investors to give Inchcape a test drive.

To the uninformed, Inchcape might sound like just another dealership. Closer inspection reveals the bulk of profits come from the group’s international distribution division. This works with manufacturers including Mercedes and Toyota to provide services including marketing, delivery to customers and aftersales. Typically the group handles jobs in smaller markets such as Chile and Romania that manufacturers tackle themselves in larger ones.

That business produces profits better than traditional forecourt retailing, where the group remains active in the UK. Operating margins in the group’s Asian distribution business were more than 7 per cent last year, despite a hit to sales from the pandemic. That compares with the measly one per cent margin Inchcape made from UK forecourt retailing in recent years. 

Investors have recognised the potential, pushing Inchcape shares 20 per cent higher so far this year. At 15 times two-year forward earnings, the highest since 2015, Inchcape is well priced. As Friday’s update shows, though, analysts had underestimated the impact on profits from costs reductions last year.

Against unprofitable online dealer Aramis — which floated this week — and Auto1, Inchcape looks a bargain at 0.5 times forward sales, a two-thirds discount to the would-be disrupters. That gap has steadily narrowed. Expect traditional dealers to gain further traction as they rev up amid the economic recovery.

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