A £234m acquisition expanding its South American business ignites the share price of global premium car dealer Inchcape (INCH), which accelerates 5.1%, or 32.5p, to 674.5p on the positive news.

Consistent with CEO Stefan Bomhard's 'Ignite' strategy, the takeover of a high-quality South American car distribution business, focused on Subaru cars and Hino commercial vehicles, from Avayu family-run Indumotora further diversifies Inchcape. Crucially, it will help the FTSE 250 firm to drive profitability across the growth markets of Chile, Peru, Columbia and Argentina.

GOING UP A GEAR

London-headquartered Inchcape is already a seasoned regional player, having distributed motors across South America for over 30 years, but the deal will see profits go up a gear in an attractive region where Inchcape now becomes Subaru's leading distribution partner.

Inchcape's earnings will be boosted by a mid-to-high single digit percentage in 2017 and Bomhard insists the acquisition will enhance the group-level operating margin. Moreover, the price paid for the cash-generative South American operation looks pretty reasonable, cash consideration of £234m representing a multiple of 8.6 times forecast 2016 EBITDA of £27m.

'This transaction will create a scale position for Inchcape in South America with a strong and balanced brand partner set, including BMW, Subaru and Hino, providing a stronger platform to benefit from the long-term growth opportunities across the continent,' reads today's statement.

'Across these four markets an expanding middle-class with greater purchasing power and better access to credit underpins the structural growth opportunity from increasing levels of vehicle ownership.'

QUALITY OPERATOR

This looks a savvy deal for Inchcape, known for the high proportion of profits it generates from Asia-Pacific and emerging markets; headwinds have included an adverse exchange rate between the Japanese yen and Aussie dollar, as well as tough trading in Hong Kong.

Regional and FX-related uncertainities remain, though the business is strongly cash generative and has myriad competitive advantages. With roots stretching back two centuries and even a book, ‘Pioneering Spirit: The Inchcape Story’, chronicling its rich corporate history, Inchcape is a unique, high-quality business with a consistently strong track record.

Inchcape - DEC 16Operations in 29 markets give Inchcape a natural hedge, while long-standing relationships with leading luxury and premium car brands - BMW, Aston Martin, Jaguar/Land Rover, Mercedes-Benz, Porsche, McLaren etc - aren't easily threatened by rivals.

Investors might also note Inchcape's diversity of earnings streams, with revenue lines spanning everything from new and used car sales to finance and insurance products and defensive, high-margin aftersales.

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Issue Date: 22 Dec 2016