TRADE of the MONTH
IM has recommended a long position in Combined Motor Holdings (CMH) and a short in Motus four times since 2021 — in March 2021, October 2021, February 2022 and May 2023. As 2023 draws to a close we review our call.
To date, it’s been a winning trade, with CMH trading at R27 and Motus at R100.80 at the time of writing. On a one-year basis before dividends, CMH has returned -3.6% and Motus is down -16.8%; this clearly highlights that the smaller, nimbler stock has been the place to be.
IM attended the presentation of CMH’s interim results and the Motus AGM fairly recently, and feedback continues to favour the selection into early 2024.
Besides the disparities in size, there are key differentials and drivers that support IM’s view.
CMH has a market value of R2bn, relative to Motus’s R18bn. The difference in the sizes of the businesses is even more startling. CMH has annual revenue of R12.3bn, with a profit before tax (PBT) of R620m, while goliath Motus has revenue of R106bn and PBT of R4.3bn.
The South African new and used vehicle market has had a challenging 12 months.
Tightening consumer spending and especially lending by banks has hit new vehicle sales.
The latest available Naamsa statistics show that new car sales are continuing to decline, with three consecutive months of soft sales being reported. Naamsa says 45,445 vehicles were sold in October — 2% lower than in the comparative period in 2022.
Both CMH and Motus have stated that new vehicle buyers are now seeking value, with two-thirds of all new passenger car sales in the R200,000R650,000 price range. Margins are much thinner in this sales bracket, in contrast with the juicier margins in premium brands.
It is interesting that the Naamsa data shows that sales of light commercial vehicles and heavy trucks remain healthy perhaps highlighting the collapse of South Africa’s long-haul railway infrastructure.
Sales have also been strong in bakkies, with new models from Toyota, Ford and Nissan gaining significant sales volumes. It seems the bad shape of the country’s roads calls for more robust passenger transportation.
Another uplift has been the growing number of purchases by car rental firms over the past months as companies re-fleet understandably so, as South Africa heads towards the inbound tourism season.
Because of the rand’s weakness, Cape Town, which is one of the top inbound tourism destinations, foresees a record season. Those visitors need vehicles, and they pay.
Both CMH and Motus have car rental subsidiaries. But this aspect is one of the key differentials between the two.
CMH owns the First Car Rental (FCR) group, which gained market share during the pandemic as its nimble cutting of costs and its affiliation with airline FlySafair paid dividends. Car rental is a major division of CMH and has shown rapid growth since the country reopened after Covid.
In recent interim results, FCR was responsible for 7% of total CMH group revenue but 52% of
PBT. This has shielded CMH from the slowdown in domestic new vehicle sales and the resultant margin compression.
Motus owns the Europcar rental business and has a leading market share. But the group does not specify car hire as a line item; it’s amalgamated in the overall retail and rental line amount. However, at the AGM, CEO Osman Arbee, when questioned, said the car rental unit brought in about 8% of profits.
Another important differential is the balance sheets of the two businesses. CMH has always been conservative hoarding cash and despising debt. At its August interim results, net cash stood at R496m, or nearly a quarter of its market capitalisation. Motus, in its June year-end results, reported it carried net debt of R13.7bn.
CMH as a small-cap company does have liquidity constraints that may have capped any material sell-off in the stock. A business with high management ownership is unlikely to get back a shareholding similar to what it has if it decides to exit. CMH also has a generous dividend policy, perhaps a feature of its ownermanagement structure.
Motus is a superbly run company. It has a wide-ranging base of vehicle retailing platforms in South Africa and overseas. However, as its dominant profit profile emanates from new car sales, it is affected more by the current weak consumer economy than CMH. And CMH is being shielded by its large car rental business.
With the summer season ahead CMH should perform well given the attractiveness of South Africa as a tourist destination. New vehicle sales will remain challenging until domestic interest rates start to fall though both CMH and Motus expect such sales to recover in late 2024. That would aid both stocks but favour Motus, given its scale. Until then, IM sticks with its choice of being long on CMH and short on Motus.