Strong yen drives down Inchcape

INVESTMENT COLUMN

The problems of Inchcape have been heavily trailed through a series of profits warnings, but the international distribution and marketing group still contrived to disappoint with its interim figures yesterday. Bad news from the motor distribution division was inevitable, and a poor performance from the marketing business expected. The shock came in pounds 64.7m of restructuring charges, which were way ahead of expectations and cut interim pre-tax profits to June by 85 per cent to pounds 18.6m on an FRS3 basis.

Extensive property write-downs and sell-offs in the first half were not anticipated; nor are they over. Disposals for the second half are expected to mean further exceptional losses of up to pounds 50m. Even Inchcape's prestigious St James headquarters is to be vacated as part of the aggressive cost cutting and restructuring.

At the root of the problems is the damage caused by the high yen to the motors divisions, which saw operating profits tumble 42 per cent to pounds 47.5m. Every 5 per cent movement in the yen has a gross impact of pounds 13m on profits, though the actual impact is softened considerably by hedging. Currency problems were compounded when car sales in Europe and elsewhere went into decline just as Toyota, Inchcape's main customer, moved into the luxury end of the market.

While new model launches should boost Toyota sales, there is nevertheless little sign that car purchases in European markets are growing fast. Meanwhile, Inchcape's marketing businesses remain fragile, illustrated by the small cut in half year profits to pounds 28.4m after a fall in consumer spending in Hong Kong and Singapore. Business in China has also been depressed under the continuing austerity measures. A brighter spot was the services division, where profits rose 18 per cent to pounds 43.5m. Profits from insurance services rose 31 per cent to pounds 25.9m, but they received a boost from cost-cutting as a result of the merger of Bain Clarkson and Hogg. The merged company is to be floated, but not before 1997.

The important thing for Inchcape now is to get a pay-back on the rationalisation charges, but that is a year or two away. Headline profits for the full year of around pounds 170m-pounds 180m will be cut to around pounds 60m after exceptionals. Even after yesterday's 17p fall to 324p, the shares stand on a forward multiple of 16.5: too high for a company that is not delivering.