Op­er­a­tional di­ver­sity keeps the tills ring­ing

Financial Mail - Investors Monthly - - Analysis - Shaun Har­ris

In what has been a dif­fi­cult mar­ket for re­tail deal­er­ship new car sales, Com­bined Mo­tor Hold­ings (CMH) was able to con­tain the decline in its new car sales to 8,3% last year, against the na­tional dealer sales drop of 9%. It’s prob­a­bly due to the ex­tended na­ture of CMH’s op­er­a­tions, which cover new cars, used cars, marine & leisure ve­hi­cles, as well as parts and fi­nan­cial ser­vices. In the words of CEO Jebb McIn­tosh: “One of the strengths of the group is that it rep­re­sents a wide range of mo­tor man­u­fac­tur­ers.”

But he adds that the new ve­hi­cle mar­ket is far from easy. “The en­vi­ron­ment re­mains ex­tremely com­pet­i­tive, es­pe­cially in the lower-value seg­ments, as man­u­fac­tur­ers strug­gled to main­tain their share of a de­clin­ing mar­ket.” Over re­cent years SA, and the world at large, has been flooded with im­ported low-cost ve­hi­cles. Also, the buy­ing pat­tern in SA has shifted. More peo­ple from the grow­ing new mid­dle class are start­ing to buy cars, of­ten for the first time.

McIn­tosh is out­spo­ken about the prob­lems he sees fac­ing the in­dus­try. “The ill-con­ceived billing sys­tem de­signed for the Gaut­eng toll roads is prov­ing to be un­work­able in a deal­er­ship en­vi­ron­ment. Ac­counts are re­ceived for ve­hi­cles long since sold and for us­age be­fore the deal­er­ships traded in the used ve­hi­cles. I hope that the in­ef­fi­cien­cies high­lighted since the open­ing of th­ese toll roads will prompt a re­think by the ap­pro­pri­ate au­thor­i­ties.”

It’s a good point but might turn out a vain wish. How of­ten do the au­thor­i­ties re­think a sys­tem in place, re­gard­less of how in­ef­fi­cient it might be?

McIn­tosh also lays into the trade unions af­ter last year’s strike at mo­tor man­u­fac­tur­ing fac­to­ries. “Labour ex­trem­ists seem to con­sider the mo­tor in­dus­try, SA’s big­gest man­u­fac­tur­ing sec­tor, to be a le­git­i­mate tar­get in pur­suit of their po­lit­i­cal as­pi­ra­tions. The loss of in­come to both work­ers and the fis­cus is se­vere.”

One di­vi­sion of CMH, car hire, is pulling in good re­sults. Growth in pre­tax prof­its is in the high teens with a firm­ing profit mar­gin of around 10,5%. It’s a nat­u­ral es­sen­tial ser­vice. Peo­ple ar­riv­ing at air­ports of­ten need to hire cars. But it’s a ser­vice that CMH has filled well.

For the past year CMH has been clin­i­cally elim­i­nat­ing loss-mak­ing re­tail mo­tor op­er­a­tions around the coun­try. The strat­egy seems to have worked. Net losses in the pre­vi­ous fi­nan­cial year of more than R10m have stopped, ac­cord­ing to the last an­nual re­sults. Less suc­cess­ful is the marine and leisure di­vi­sion, notch­ing up losses. That’s also fairly in­evitable in the cur­rent eco­nomic cli­mate. With many peo­ple strug­gling to af­ford a new car, only the wealthy are in the mar­ket for boats and leisure ve­hi­cles. It seems this di­vi­sion may be on the chop­ping block. “Man­age­ment is re­view­ing its op­tions re­gard­ing the fu­ture of this op­er­a­tion,” says McIn­tosh.

Also fac­ing an un­cer­tain fu­ture is the MG sports car brand. It’s an iconic ve­hi­cle, driven by mu­sic stars and ac­tors around the world, but it’s not sell­ing in SA. McIn­tosh says the range has pro­duced dis­ap­point­ing re­sults, at re­tail and im­porter/dis­trib­u­tor level. “Sig­nif­i­cant de­lays in the pro­duc­tion of the new range of smaller and higher-vol­ume MG mod­els has meant that the busi­nesses have not been able to cover over­heads with the low vol­ume of sales. Man­age­ment is as­sess­ing its op­tions re­gard­ing the fu­ture of this ven­ture, par­tic­u­larly in light of the re­cent cur­rency de­te­ri­o­ra­tion.”

There are two ar­eas of con­cern, though nei­ther might mean much. Two di­rec­tors re­cently re­signed from the board of CMH. And in Septem­ber San­lam In­vest­ment Man­age­ment (SIM) sold 0,21% of the to­tal is­sued shares of CMH. How­ever, it still re­tains a 4.95% hold­ing.

McIn­tosh seems quite con­fi­dent in the busi­ness. With the last fi­nan­cial re­sults he said: “Af­ter a slow start to the fi­nan­cial year, the group ex­pe­ri­enced an im­prove­ment dur­ing July and Au­gust, and the early signs are that this trend will con­tinue.”

The share price has held up but spec­tac­u­lar cap­i­tal gains from CMH in the year ahead are un­likely. The PE is a rel­a­tively mod­est 9,1 times and the com­pany pays a gen­er­ous div­i­dend, 5,5%. For this rea­son IM rates CMH a buy.

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