Verallia / Inchcape: Q1 2024 Results
Two good earnings reports rewarded by Mr. Market. Both shares are still cheap.
The past 24 hours have been busy with earnings releases for the model portfolio, including five reports since yesterday evening. I'll focus on two companies not previously discussed in depth: Verallia and Inchcape.
Disclaimer: This content is for educational and entertainment purposes only and is not intended as financial advice. Perform your own research and consult a qualified financial advisor. The author may hold positions in the discussed stocks. This is not a recommendation to buy or sell securities.
Verallia - VRLA.PA
Verallia is the European leader in glass packaging for beverages and food. It operates in an industry typically known for its stability and GDP-like growth. However, like for many other companies, COVID-19 and its subsequent ripple effects significantly impacted demand and Verallia’s business operations.
In 2023, Verallia managed to significantly increase prices to counter a big drop in volumes, achieving a record €1.1 billion in EBITDA. For context, with a current share price of €35.52, the company's market cap is €4.2B and its enterprise value €5.6B, resulting in a LTM EV/EBITDA of 5.1x.
Why is the valuation so low? This low multiple reflects market expectations that the LTM earnings are not sustainable. For now, 2023 results represent peak earnings, and it's uncertain how much future earnings will decline before rebounding.
At the FY23 presentation, the company guided for €1B of EBITDA in 2024:
“After 2023 saw a sharp weakening in demand in Europe under the combined effect of a drop in end consumption and destocking downstream of the value chain, we foresee a gradual recovery in activity over the course of 2024.
In this context and in spite of limited visibility, Verallia has set itself a target to generate adjusted EBITDA of around €1 billion in 2024, with such EBITDA down year-on-year in the first half (high 2023 comparison base) but up year-on-year in the second half (rebound in volumes).”
This seemed ambitious without seeing actual signs of the recovery.
Today, Verallia released their Q1 24 earnings, which was rewarded by the market with an almost 5% increase in share price.
The company’s earnings took a big hit for the quarter…
“Adjusted EBITDA at €204 million (24.4% margin) from €307 million in Q1 2023 (29.2% margin) “
… but what mattered most was the fact that they confirmed seeing a rebound and reiterated their €1B EBITDA goal for 2024.
“Verallia started the year in line with expectations, with lower activity and prices compared to Q1 2023 which set a high basis of comparison. As expected, we are seeing encouraging signs of recovery from the Q4 2023 low. The continued commitment of our teams and the impact of the Performance Action Plan have enabled us to post a sequentially improving performance in the current market context.
We confirm our guidance of an adjusted EBITDA of around €1 billion in 2024, with performance gradually improving over the course of the year”
If you’re interested in Verallia or the industry, I highy recommend these Substack posts:
The author is pitching competitor Vidrala, but to me he actually made Verallia sound more appealing.
Inchcape - INCH.L
Inchcape is a global automotive distributor, with a minor segment in “UK Retail” which consist of car dealerships. While car dealerships are generally good businesses in the US, they are less so in the UK. Inchcape has been working on becoming a pure-play distribution business.
… strategic focus on higher margin, capital-light, cash generative, diversified, scalable and global Distribution busines.
On April 15th, they announced the sale of their UK retail operations to Group 1 Automotive for £346m. This sale represented 7% of their EBIT but fetched 9.6% of their EV at the time. The transaction is expected to close in Q3 2024, after which Inchcape will essentially become a pure-play distributor.
£100m from the proceeds will go to share buybacks, or about 3% of shares.
I bought a position in the model portfolio that day, at 725p per share. This transaction, like all others, was mentioned on Substack Notes.
Today they released Q1 24 results. Inchcape reported 5% revenue growth and reiterated their FY24 guidance.
With EU & APAC seemingly trading ahead of expectations, an analyst asked whether the FY24 outlook should be raised. Management felt like it was still too early in the year to upgrade the FY24, but it did sound like they were simply being conservative.
“We feel good about our first quarter. The interims are only a few months away when we'll give you a better sense of how we've seen Q2 and the year. But we feel confident about the business, and we're making really, really, really good progress. But we're only three months in.”
The market liked the results and the outlook. The stock is currently up 9% to 786p.
Valuation
At a 786p share price, the company’s market cap is about £3.3B. Screeners may overstate the company’s debt. I suspect some working capital payables end up in the EV calculation, which should not be the case. According to the company, net debt, excluding leases, was £600 million at the end of FY23.
That leads to an EV of £3.9B (prior to the disposal of the UK retail segment).
FY23 EPS was 84.8p. Analyst estimates for ‘24-’26 EPS are 86p - 96p - 104p. This results in a forward P/E of 9.15x.
(It’s unclear if this accounts for the disposal of the UK retail operations, but either way the impact of that would be small.)
This seems cheap for a distributor. I generally like distributors as a business because they have the counter-cyclical characteristic of generating cash in a downturn, by releasing working capital.
Capital Allocation
Many companies in the UK have an irrational commitment to their dividend. Rational investors like you and I would prefer a flexible approach, with more buybacks when the stock price is low. The lack of withholding taxes in the UK minimizes some of the issues with a dividend, but it will still depend on your personal tax situation.
Inchcape is one of those that are sticking to their dividend, currently yielding 4.7%.
Their policy is to pay out 40% of EPS as dividends. While share buybacks are part of the capital allocation toolbox, unfortunately, they are not a priority.
Management says they’re aware of their own valuation multiple (implying they understand the appeal of buybacks) and are discipined regarding price paid for M&A targets. However, they want to keep paying dividends and delever first, even though their £600m net debt (0.8x EBITDA and below their self-imposed limit of 1x) seems quite manageable.
I was disappointed that only £100m of the £350m from the recent transaction will be allocated to buybacks, but it’s a start. There’s hope that they’ll do more after the company has delevered a bit and they can’t really find cheap M&A opportunities.
If not, it’s still cheap company growing earnings with a 4%+ dividend yield and 3% buyback yield.
Don’t be shy. Smash that like button, comment or share with someone who might enjoy it.
Why would you buy Inchcape, and not Stellantis, they're correlated, and Stellantis is way cheaper?