Operational diversity keeps the tills ringing
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.