Berenberg cuts Inchcape on Volkswagen and Aussie dollar worries

Berenberg has downgraded Inchcape to 'hold' from 'buy' on new-found concerns for the car dealer's businesses in the UK, Hong Kong and Australia.

Although the stock is cheap on a p/e ratio basis, Berenberg said, the three business account for almost two-thirds of group operating profit and could put earnings per share momentum at risk over the next year.

The concerns in the UK relate to Inchcape's margins declining to their lowest level since 2008 in contrast with the rest of the market, largely felt due to the company's large exposure to Volkswagen in the UK, representing around 20% of retail franchises and where sales have come under pressure last year following the emissions-cheating scandal.

While Inchcape’s management declined to provide exact figures on the UK impact of the scandal, Berenberg believes in the fourth quarter alone it could have amounted to a loss of circa £3m to EBIT - or 5% of full year UK profit.

"With VW sales in the UK down by 13.5% year to date, we believe Inchcape’s UK business could be at risk if this trend continues," the German bank said in its note, with the UK being 20% of 2016 expected EBIT.

As for Australia, which represents 26% of 2016 EBIT, the concerns relate to the big focus on Subaru, which is bought in Japanese yen and so the deprecation of the Australian dollar presents a risk to margins.

"While the company believes that it can share some of this pain with the dealer network, we wait to see how much can be passed on," Berenberg said, rubbing out £3m of its EBIT forecast for the unit and warning it could arguably be more.

Although the Hong Kong dollar's appreciation is expected to generate a £6m tailwind, analysts fear Inchcape’s business in north Asia will not grow at all in EBIT terms in 2016, given the major slowdown in consumer and business confidence there.

Berenberg has cut its price target to 735p, from 915p, on EPS forecasts cut to 54.3p from 55.64p for 2016.