Inchcape (LSE: INCH) and Accesso Technology Group (LSE: ACSO) are on a roll today, with their shares up 7.8% and 22% at the time of writing, respectively — why is that? And, equally important, should you buy into their rally?
Inchcape Is Undervalued
The automotive retailer and distributor reported today its half-year results for the six months ended 30 June, which showed:
- Like-for-like revenues growth of 7.8%, at constant currency;
- Solid underlying operating profit growth of 5.6%;
- 20 basis points of operating margin expansion to 4.7%, boosted by the more profitable Distribution segment; and
- A new £100m share buyback, which reinforces a commitment to capital efficiency.
Growth in revenues on a reported basis was only 1.3% against the first half of 2014, but the growth rate in its £159.2m operating profit — which excludes a one-off income of £17.3m from divestments — demonstrates that Inchcape is a solid and diverse business.
By the very nature of its operations, its operating margin is rather low and is closely monitored by investors and analysts: the improvement in the first half of the year points to the likelihood that Inchcape will easily manage to meet the target of £320m for operating income in 2015 — or it could even beat market forecasts. In fact, a target of 5% for its operating margin shouldn’t be ruled out in 2016, particularly if the more profitable distribution unit outpaces the growth rate of the retail segment.
Valuation
Its shares do not strike me as being particularly expensive due to a strong net cash position and higher profitability at group level — they currently trade on net earnings multiples of 14.8x and 13.4x for 2015 and 2016, respectively.
If earnings per share (EPS) continue to grow in line with expectations — which is a distinct possibility, in my view — their compound annual growth rate (CAGR) for 2014-2017 will be about 15%, while the CAGR for dividends is expected at 6% over the period.
Yet Inchcape could surprise investors on this front. “Given our first half-year performance and our strong financial position, the Board is pleased to declare an interim dividend of 6.8p (2014 H1: 6.3p) representing an increase of 7.9%,” the group said today.
Furthermore, reported basic adjusted EPS came in at 25.4p (2014 H1: 27.1p), which means that Inchcape could beat expectations of EPS at about 51p in 2015. After all, the car dealer is still underperforming in Australasia, South Asia and Europe, which combined represent 42% of its £170m trading income before costs — so there’s plenty of room for improvement.
Its shares are up to 810p today, for an implied +13% performance this year — I’d surely bet on more upside into the second half of 2015 and beyond.
Accesso Technology Wraps Merlin Deal
Things are not that straightforward with Accesso Technology, a £100m market-cap business that promises plenty of growth into 2017 — the problem is that we do not know much about financial projections as yet.
Its trading update was released today and was a bit light in terms of details, to be honest. “Based on excellent momentum across all of its business divisions, the board of accesso is delighted to reiterate its guidance for 2015,” it said.
“In addition, encouraged by strong trading, and excellent new contract momentum across the business, the Board now expects 2016 to be ahead of current expectations, and 2017 to be materially ahead of current expectations,” it added.
That said, the shares were boosted by news of the signing of an exclusive long-term agreement with “Merlin Entertainments Group to provide its fully hosted onsite ticketing and eCommerce solutions across the operator’s global portfolio.” The initial contract term is for seven years — news of which pushed up the stock to its 52-week high of 650p.
