Robin Andrews picks automotive stocks for the post-Brexit era

    27 May 2017

    The challenge of finding undervalued, publicly quoted enterprises with interesting prospects in the automotive sector is, as Matthew Lynn says, a formidable one. For a start, the leading manufacturers are Japanese-, American-, German- or Indian-owned, making them harder to invest in from the UK, with added foreign exchange risks. And this is an industry which works on long lead times as governments reflect on which new technologies to subsidise, and manufacturers consider multi-billion-dollar investment bets on new models and technologies. Stock markets, by contrast, are inevitably short-termist. Nevertheless, the UK automotive sector, particularly component production, is expected to keep growing. And we know that hydrogen fuel cells, lithium-ion and solid-state batteries and driverless navigation systems are bound to be part of the future. So the search is worthwhile. Here are three tech ventures and two blue-chips that should survive and could prosper, whatever Brexit brings:


    Share price 139p
    Market cap £31m

    This company makes sound and thermal insulation material for vehicles made by leading manufacturers, and also supplies the aerospace and building sectors. Six months after its AIM launch, it received notice that one big customer had reduced production plans, and had to announce likely reduced sales/profits for this year. Then came the resignation of the long-serving chief executive. The shares tumbled. Fortunately, £13 million had been raised at 200p a share in the IPO last year and cash balances of about £3 million remain. The strategy was always to diversify the customer base and this is now more important than ever. There’s talent in the company to recover from the unexpected setbacks. A potential winner for the patient investor.


    Share price 41.5p
    Market cap £32m

    Here is a world leader in solid-state battery technology, with the advantage of holding about £7 million in cash following a placing last October at 50p. For many smaller applications, solid-state has advantages over standard lithium-ion technology: it’s non-flammable and has faster charging and charge-retention qualities, as well as being small. Ilika has been in partnership with Toyota for some years but intends to work with other manufacturers in due course — when a technology is validated, it will license others to make the products in return for royalties. Ilika chairman Mike Inglis used to be commercial director at ARM Holdings, a company that commercialised its patented technologies rather successfully. If Ilika follows the ARM model, investors could be in for an exciting time.


    Share price 20p;
    Market cap £54m

    This clean-energy venture is an old favourite, last tipped a year ago at 13.75p. Four months ago the company raised £5.7 million at 17p, so should be able to keep going — especially with an order book in excess of £24 million, mainly for its energy-storage technology. Hydrogen fuel for vehicles is the other part of ITM’s story. As of now, the company has only 12 operational hydrogen refuelling stations (HRSs), all dotted around London. But things are changing as UK cities take steps to improve air quality. ITM has plans for further HRSs on the M1, M4, M25 and M40 ahead of the roll-out of commercial and passenger fuel-cell electric vehicles. It has permission for sites in Birmingham, Swindon and Sheffield, and has identified others. After the election, expect additional government support for the hydrogen-cell industry. ITM will be a stock to own as the clamour for clean air builds.


    Share price 350p
    Market cap £6.2bn

    GKN has gone a long way since it started life as an iron maker in Merthyr Tydfil in 1759. It’s now a global engineering business and the UK’s only significant automotive component maker — albeit largely in its European, US and Asian subsidiaries. Sales of £9.4 billion in 2016, giving profits before tax of £678 million and earnings per share of 31p, are the key figures. But at 350p, are the shares cheap? Both the automotive and aerospace industries expect annual growth of 2-5 per cent over the next few years, and the consensus of analysts’ opinions is for steady, modest growth in all areas of GKN’s business. What’s certain is that, as the world weans itself off hydrocarbon to adopt new technologies, GKN will be at the forefront of change. This is a share to hold for the long term.


    Share price 849p
    Market cap £3.6bn

    Once a Scots-owned Far Eastern trading company, Inchcape is now a marketing and distribution business concentrating solely on the motor industry: a distributor or retailer for marques such as Subaru, Toyota, Mazda, Jaguar Land Rover, Mercedes-Benz and Volkswagen in many parts of the world. The outlook for UK car sales post-Brexit may be uncertain, but only 15 per cent of Inchcape profits come from UK trading, and it is well positioned in overseas growth markets. Analysts’ estimates for 2017 earnings are around 65p a share, which puts the PE multiple on an undemanding 13 times. A South American acquisition last year should contribute to profits in 2017 and Africa offers more scope for expansion. The company looks well-run and the founder James Mackay, first Earl of Inchcape, can sleep in peace; so too could a new shareholder who is prepared to hold for the long term.