Stock Stories brings you closer to the heart of our investment strategy. In these short videos, our investment team discuss interesting stocks and how they contribute to our objectives of delivering a high and rising income together with capital growth for our shareholders by investing in a diversified portfolio of well-established UK-listed companies.
In this short episode of ‘Stock Stories’, Portfolio Manager Simon Gergel discusses an investment decision that was made and is illustrative of the Trust’s strategy: Inchcape. Simon shares his thoughts on how it aligns with the Trust's objectives of seeking to deliver a high and rising income together with capital growth.
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I'm Simon Gergel, Lead Portfolio manager of The Merchants Trust. All investments come with risk, and when looking at potential investments in equities, it's important to think about risk. For Merchants, we seek to mitigate some of this risk by focusing on buying good companies with strong balance sheets and the potential to pay attractive dividends, whilst making sure we don't pay too much for them.
In our view the UK market at the moment is a stock pickers dream. It offers a diverse range of quality companies, many of them trading at prices that don't reflect their true worth. UK mid-caps have been particularly oversold. One company we bought at a compelling valuation for the portfolio is Inchcape, the world's largest independent car distribution company. Car distribution involves exclusive relationships with car manufacturers to carry out the activities in smaller markets that they would normally do in larger markets, such as brand marketing, importing and distributing vehicles and parts, and arranging customer warranties.
Inchcape is on an ambitious growth journey powered by its ‘Accelerate’ strategy – a response to an industry undergoing rapid change. Car manufacturers need strong partners in smaller markets to manage an increasingly complex industry structure and to provide the latest digital connectivity to consumers. In April 2024, Inchcape announced the sale of its UK retail operations, completing its transition to focus on its higher margin capital-light and cash generative distribution division.
Revenues here depend less on car pricing, but more on brand volumes and the strength of long term relationships. Inchcape has partnerships with more than 60 automotive brands in over 40 markets. These include some of the world's most iconic car manufacturers, such as BMW, Jaguar Land Rover, Mercedes-Benz, Toyota and Volkswagen. In geographies that reach from South East Asia to East Africa and from Europe to Latin America. Some of these relationships date back decades. For example, Inchcape has represented Toyota in Hong Kong and Subaru in Australia for over 50 years.
We sold Inchcape on valuation grounds in 2021, but in May 2023 we were able to reinvest, below our sale price. We aren't making a recommendation to buy shares in Inchcape, but we believe the company merits a place in the portfolio of The Merchants Trust. Inchcape has a disciplined approach to capital allocation and a commitment to returning cash to shareholders through dividends and buybacks. That makes it a great fit for Merchants, which has a rich heritage of delivering both income and capital growth to investors.
Disclaimers: Past performance does not predict future returns. Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.
Understanding the Merchants Trust Investment Strategy
The Merchants Trust plc (MRCH) favours companies that we believe have strong cash flows and good fundamentals, with a valuation below the team’s assessment of their intrinsic worth. MRCH targets the best opportunities for investing for dividend yields and long-term capital growth, to create a carefully crafted and concentrated high conviction portfolio consisting of a relatively small number of leading UK stocks in which the manager has strong belief. That reflects the Trust’s preference for concentrated investing versus diversified investing.
A focus on capital growth and dividend investing
The Trust’s portfolio is composed of some of what we believe are the UK’s best-known and most stable companies, with strong balance sheets and the potential to pay good dividends. As long-established businesses, we consider that they benefit from strong market positions with high brand awareness and a loyal customer base, and they operate in areas where the barriers to entry are relatively high. They tend to generate reliable earnings and have a strong history of maintaining generous dividend payouts.
Investing in Inchcape: A Merchants Trust Investment Case Study
Inchcape is illustrative of the Trust’s investment decisions and strategy. It is the world’s largest independent car distribution company, benefiting from exclusive relationships with car manufacturers that allow it to carry out activities in smaller markets – such as brand marketing, importing and distributing cars and parts, and arranging customer warranties – that the carmakers themselves would normally do in larger markets.
Buying back into Inchcape
The Trust sold out of the company in 2021 but bought back into the stock in 2023, at a lower price than it was originally sold for. Inchcape has implemented its ‘Accelerate’ strategy, which is designed to navigate an increasingly complex industry structure and provide the latest digital connectivity to consumers.
The business has also restructured to focus on its higher-margin, capital-light and cash-generative distribution division, where revenues depend less on car pricing and more on brand volumes and the strength of long-term relationships.
Inchcape has partnerships with over 60 auto brands, in more than 40 markets worldwide. These include relationships with some of the world’s most iconic carmakers, such as BMW, Jaguar Land Rover, Mercedes Benz and Toyota. Some of these partnerships date back decades. For example, Inchcape has represented Toyota in Hong Kong and Subaru in Australia for more than 50 years.
Inchcape and The Merchants Trust
We believe Inchcape has a disciplined approach to capital allocation and is committed to returning cash to shareholders via dividends and share buybacks. That makes it a good fit for the Trust, which has a rich heritage of aiming to deliver both income and capital growth to investors.
This is not a recommendation to buy Inchcape, but simply explains why the company merits a place in The Merchants Trust. It also highlights the Trust’s strategy of investing in UK companies and investing in concentrated portfolios. There are clearly risks associated with investing in any individual stock. In Inchcape’s case, these include a downturn in the global auto market as well as geopolitical events in key markets.