Little to commend Inchcape until world economy stabilises

[Tony]

Jaguar Land Rover?s factories in the UK are working on a four-day week and Vauxhall?s Ellesmere Port plant is closed to reduce output. President Sarkozy is calling for a cash lifeline for Europe?s car manufacturers and Toyota is predicting a 10 per cent drop in European sales this year.There can be no doubt that the car market in Europe has run out of gas, as consumers tighten their belts and cancel or defer big-ticket purchases, particularly of new cars.If selling a car now is tough, making a case for the shares of Inchcape, the car dealership, is nigh on impossible. The bull case for Inchcape was always that unlike other largely British dealerships ? Pendragon and Lookers ? it is insulated to some extent by its business in emerging markets, particularly Russia and Asia.But the UK business still represents 20 per cent of profits and the latest figures from here are woeful. Sales have fallen off a cliff since early summer. Inchcape?s British new car sales fell by 1.6 per cent in the quarter to the end of June but plunged 18.8 per cent in the 12 weeks to the end of September. During September, when the worst of the financial crisis hit the headlines, new car sales fell by more than a fifth. Inchcape thinks that 2008 sales will be down 9.5 per cent on the previous year. Next year, it is predicting a drop in sales of between 15 per cent and 20 per cent.And the news from Europe is little better. Trading conditions are becoming more difficult and the weakness is spreading to the Baltics, where Estonia and Latvia are seeing sales significantly below last year?s levels. Only Russia continues to grow strongly ? up 40 per cent on the year to date.Meanwhile, markets in Asia and Australia, while still reasonably strong, are expected to slow as well.In its favour, Inchcape is taking action to cut costs and reduce its overheads. Job cuts across the UK?s 6,000 staff are inevitable and are likely to hit sales staff hardest. There are plans to close 12 UK sites and reduce the HQ.Inchcape talks of a stronger, more robust business emerging but it could be more than a year before consumer sentiment improves, while continued growth in Russia and Asia must look increasingly doubtful.Thankfully, at least 50 per cent of Inchcape?s business is in parts and servicing but it will see huge pressure on margins as it competes with local mechanics to maintain cars that are out of their three-year warranty. Meanwhile, the company?s net debt of £550 million or so remains well-covered and Inchcape has no refinancing needs until 2011.The shares are now on a historic yield of almost 21 per cent. But with analysts pencilling in a 15 per cent drop in profits for this year and even worse for next there is little sign that anything will jumpstart this stock until the UK economy stabilises, certainly after 2009. Sell.UK Coal Just to turn the clock back to the Seventies, there was a profit warning from UK Coal yesterday. No one relies on the coal industry as they did then, but it still has the power to disappoint. UK Coal, which has four deep mines, has been toying with our fantasies of late. First, it tried to reinvent itself as a property company with a large land bank all ready for housebuilding, then it teased with the possibility that it could open more pits to respond to record coal prices. However, the problems that prompted the profit warning look depressingly familiar. Weather, equipment breakdown and plunging coal prices mean that UK Coal?s profits are likely to be £40 million this year, rather than the £70 million previously suggested. With regard to prices, which have collapsed by 32 per cent since August, UK Coal was never going to reap the benefit of the highest prices because it had legacy contracts to fulfil, struck while prices were low. It has also been hit by falling production volumes and the value of its land bank looks iffy. Planning permission is in place but land prices are softening and housebuilders are not buying. UK Coal hopes that coal prices, still relatively high in historic terms, will recover by the end of next year, when the legacy contracts expire. Optimists see huge upside, but the company looks like a risky amalgam of commodities and property right now. Avoid. Computacenter The coming months are make or break for Computacenter, the managed desktops and data centre services group. As the world teeters on the brink of a global recession and corporate spending grows increasingly more cautious, its army of sales people is gearing up for the busiest time of its financial year. Typically, the company does most of its business ? reselling computer equipment and providing accompanying services ? in the closing weeks of its fourth quarter as corporate purse strings start to relax. This year, however, customers are likely to be rather more circumspect. Moreover, Computacenter could be left holding bad debts, should its customers falter, such as the £1.2 million hit it will take after the bankruptcy of a big financial services client. The timing of the downturn is bad news for the group, which otherwise is doing all the right things. It is evolving into a services-led enterprise and is selling a greater proportion of its more lucrative newer offerings to its existing customers. However, the company did nothing yesterday to assure investors that its outlook was anything other than uncertain at best, as it reported flat third-quarter sales at constant currency. The group?s shares trade cheaply, having weakened substantially over the past year, but the risks are too high for newcomers. Avoid.

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