NOT FAST, NOT FLASHY

But de­pend­able CMH keeps clock­ing up prof­its

Financial Mail - Investors Monthly - - Front Page -

Most com­pa­nies can look like su­per­stars in boom times but not many have what it takes to beat the odds when the go­ing gets re­ally tough.

Com­bined Mo­tor Hold­ings (CMH), a com­pany that sel­dom, if ever, makes bold head­lines, has proved it has what it takes.

The ve­hi­cle deal­er­ship group head­quar­tered in Umh­langa, KwaZulu-Na­tal, made it look easy as it lifted head­line EPS from 156.7c in its fi­nan­cial year to Fe­bru­ary 2014 to 332.9c in 2018. It rep­re­sented an in­crease of 112% and an av­er­age an­nual growth pace of 20.7%.

CMH share­hold­ers were also re­warded through div­i­dend pay­ments which were upped by 106% be­tween 2014 and 2018.

As im­pres­sive was CMH’s abil­ity to im­prove prof­itabil­ity. One key met­ric, re­turn on share­hold­ers’ funds, im­proved from a solid 27.2% in 2014 to 38.9% in 2018.

CMH achieved ex­cep­tional growth against the back­drop of one of the worst slumps yet in new ve­hi­cle sales.

Be­tween 2010 and 2013, new ve­hi­cle sales showed ex­cep­tional growth, ris­ing in to­tal by al­most a third from 492,907 to 649,914. Then the wheels started to come off.

In 2014 new ve­hi­cle sales came in 0.7% down. The pace quick­ened in 2015 with sales fall­ing 4.1%.

The big dam­age came in 2016, when new ve­hi­cle sales plum­meted 11.4% to 547,546. It left to­tal ve­hi­cle sales down 101,669 (15.7%) on the level of just three years ear­lier. Car sales were hard­est hit, fall­ing by 89,032 units (19.8%) to 361,264 in 2016.

There was some re­spite, though mar­ginal, for the hard­pressed mo­tor in­dus­try in 2017. Putting on a late-year surge, new ve­hi­cle sales for the year ended 1.8% up at 557,586, an in­crease of about 10,000 units.

Car sales edged ahead by 6,800 units, but for the lux­ury end of the new car mar­ket there was no joy, with sales fall­ing 8.1%.

“Over the past three years sales of lux­ury cars have fallen by more than 35%,” says Jebb McIn­tosh, CEO and co-founder of CMH.

CFO Stu­art Jack­son adds: “New car buy­ers have been shop­ping down to more af­ford­able ve­hi­cles. In the en­try-level to medium-priced seg­ments OEMs [orig­i­nal equip­ment man­u­fac­tur­ers] have been keep­ing pric­ing flat.”

CMH has been for­tu­nate in hav­ing a rel­a­tively low expo-

sure to the lux­ury end of the new car mar­ket. “We only rep­re­sent Jaguar, Land Rover and Volvo in the up­per end,” says McIn­tosh.

CMH’s past fi­nan­cial year to Fe­bru­ary was an­other par­tic­u­larly suc­cess­ful one, with HEPS com­ing in 17.1% up and the div­i­dend in­creas­ing by 15%.

The key driver of profit growth was the ve­hi­cle re­tail seg­ment, where rev­enue was up 3.4% to R9.95bn, 93% of group rev­enue of R10.6bn. The big boost to the ve­hi­cle re­tail seg­ment came from an in­crease in op­er­at­ing mar­gin from 2.57% to 3.08%, which re­sulted in op­er­at­ing profit jump­ing by R60m (24%) to R307.47m, 70% of the group to­tal of R438.38m.

Driv­ing the ve­hi­cle re­tail seg­ment’s op­er­at­ing mar­gin higher has been an im­por­tant fo­cus for sev­eral years — it has risen from 2.2% in the year to Fe­bru­ary 2014.

“We have been clos­ing loss­mak­ing branches,” says Jack­son. “It has lim­ited to­tal rev­enue growth, but growth from our con­tin­u­ing op­er­a­tions re­mains strong.”

In­deed, it does. “We achieved [vol­ume] sales growth of 11.8% across new and used ve­hi­cles in our past year,” says McIn­tosh.

So far in CMH’s cur­rent fi­nan­cial year new ve­hi­cle sales have been mov­ing in the right di­rec­tion, in­creas­ing by 1.1% in March, 3.6% in April, 2.4% in May and 3% in June. But how sus­tain­able is the im­prov­ing sales trend?

Nico Ver­meulen, di­rec­tor of the Na­tional As­so­ci­a­tion of Au­to­mo­bile Man­u­fac­tur­ers of SA (Naamsa), says there are three key trend in­di­ca­tors to con­sider: GDP growth, in­ter­est rates and ve­hi­cle prices.

At present the out­look for GDP growth is im­prov­ing — off a very low base — while in­ter­est rates are likely to re­main sta­ble. The re­ally big im­pon- de­r­able, says Ver­meulen, is the fu­ture move­ment in new ve­hi­cle prices, which are closely re­lated to strength or weak­ness of the rand.

In 2017 a strong rand en­abled OEMs to limit the weighted av­er­age in­creases in car prices to just 2.1% and in light com­mer­cial ve­hi­cles (LCV) to 4.4%. Of con­cern, warns Ver­meulen, is that the rand has weak­ened by about 9% to the dol­lar this year.

Naamsa does not be­lieve the growth pace in the car seg­ment in the first half of the year will per­sist and for the full year pre­dicts that sales will rise by only 1% to 375,000. LCV sales are ex­pected to grow 4.2% to 170,000.

Naamsa ex­pects the pace in the car seg­ment to pick up in the fol­low­ing two years and pre­dicts 2.1% growth in 2019 and 3.4% in 2020. LCV sales are pre­dicted to grow at around 4% in both years.

While Naamsa’s out­look in­di­cates rea­son­able trad­ing con­di­tions, it is a far cry from the boom times when in the four years to 2006 new car sales dou­bled from 241,000 to a record 481,000.

To sus­tain its strong profit growth trend, CMH will be look­ing to con­tinue shift­ing ve­hi­cles off its show­room floors at a pace well above the in­dus­try av­er­age. Mak­ing this even more im­per­a­tive, Jack­son says in­creas­ing the re­tail sales op­er­at­ing mar­gin much fur­ther will be a big ask.

McIn­tosh is con­fi­dent that CMH can con­tinue to out­per­form the mar­ket. In its favour, he be­lieves, is the group’s adop­tion of dig­i­tal mar­ket­ing chan­nels, which is pro­vid­ing it with a solid com­pet­i­tive ad­van­tage.

“We have es­tab­lished a ded­i­cated dig­i­tal mar­ket­ing unit which I be­lieve has put us a step ahead of the op­po­si­tion. Be­tween 80% and 90% of our mar­ket­ing ef­fort is now through dig­i­tal chan­nels.”

But McIn­tosh is quick to em­pha­sise: “The ba­sics re­main the same. It is only the way we go about do­ing them that has changed.”

The ba­sics, which McIn­tosh says re­volve around a “hand­son man­age­ment” style, have been in place since he and Mald­wyn Zim­mer­man joined forces in 1976 to es­tab­lish CMH.

It was a very small start. “We be­gan with three deal­er­ships sell­ing Dat­sun, Chrysler and Chevro­let ve­hi­cles,” says McIn­tosh.

Ex­pan­sion was mea­sured. “We steadily added ve­hi­cle fran­chises, but we never un­der­took any ma­jor ac­qui­si­tions,” says McIn­tosh. “You could say we built the busi­ness brick by brick.”

Though McIn­tosh is now 72 and has served as CMH’s CEO for an ex­cep­tional 42 years, he has no in­ten­tion of re­tir­ing any time soon. “I am in good health and still pas­sion­ate about the busi­ness. But when the time does come for me to re­tire there are a num­ber of ex­ec­u­tives who will be very ca­pa­ble of tak­ing my place.”

Im­por­tantly, McIn­tosh’s in­ter­ests have al­ways been closely aligned with those of other share­hold­ers. With a 34.8% stake in CMH worth R740m he ranks as its largest share­holder. Jack­son, who has been with CMH since 1979, ranks sec­ond with a 7.9% stake.

Through its strat­egy of grad­ual ex­pan­sion, CMH to­day op­er­ates 59 re­tail out­lets in KwaZulu-Na­tal, Gaut­eng and the West­ern Cape and rep­re­sents 16 OEM brands. Based on its past ex­pe­ri­ence, the big­gest driv­ers of sales growth are Toy­ota, Nis­san, Honda and Mazda.

CMH is con­tin­u­ing with its grad­ual ex­pan­sion and will in its cur­rent year add seven to eight new out­lets, says McIn­tosh.

But ex­pan­sion does not come cheaply. “The days of the big show­room are gone, but OEMs con­tinue to in­sist on us hav­ing show­rooms pur­pose­built to their de­mand­ing spec lev­els,” says McIn­tosh. “In re­al­ity cus­tomers no longer care a darn.”

Over the years, CMH has also di­ver­si­fied into other ar­eas of the mo­tor in­dus­try, one of the most no­table be­ing into car rental. It is a mar­ket seg­ment CMH en­tered in 1999 when it ac­quired the SA fran­chises for US car rental groups Na­tional and Alamo.

CMH went on its own in 2008 with the es­tab­lish­ment of its own brand, First Car Rental. “We have built a great track record in ve­hi­cle rental,” says Jack­son.

To­day CMH’s rental di­vi­sion op­er­ates through 51 branches with a fleet of 7,000 ve­hi­cles with a value at cost of more than R950m. In CMH’s past year First Car Rental gen­er­ated rev­enue of R497m and a 10% rise in pre­tax profit to R64m, 19% of the group to­tal. Mea­sured over five years, the di­vi­sion’s pre­tax profit was up by more than 170%.

An­other di­vi­sion that has pro­vided a use­ful boost to group re­sults is fi­nan­cial ser­vices. In the past year it de­liv­ered only a 3% rise in pre­tax profit to R34m, but over five years its con­tri­bu­tion had tre­bled.

The main driver of fi­nan­cial ser­vices prof­its is ve­hi­cle-re­lated in­sur­ance, which CMH un­der­writes for three to five years. The di­vi­sion also has al­liances with Absa and WesBank which, says Jack­son, rep­re­sent an im­por­tant source of com­mis­sion in­come.

CMH also comes with a strong bal­ance sheet on which the only debt — R563m at the end of Fe­bru­ary — is re­lated to its rental fleet. Cash on the bal­ance sheet at the end of Fe­bru­ary stood at R373m, while net cash flow for the year amounted to R134m af­ter tax.

Over­all, CMH is an im­pres­sive com­pany man­aged by ar­guably the most ex­pe­ri­enced and ca­pa­ble team in its in­dus­try. And while its profit per­for­mance has also been in a class of its own, CMH, on a 10.3 p:e and of­fer­ing a div­i­dend yield of 6.3%, re­mains a share that shouts value.

For the se­ri­ous long-term in­vestor CMH de­mands close con­sid­er­a­tion.

We have es­tab­lished a ded­i­cated dig­i­tal mar­ket­ing unit which I be­lieve has put us a step ahead of the op­po­si­tion

Pic­ture: 123RF — PAKORN SUNGKAPUKDEE

Pic­ture: 123RF — FELIPE CAPARROS CRUZ

Pic­ture: 123RF — WELCOMIA

Pic­ture: TE­BOGO LETSIE

Jebb McIn­tosh, CEO and co-founder of CMH

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