TRADE of the MONTH

Overall, the picture remains rosier for CMH than it does for Motus Holdings

“CMH, with an August reporting period, will have lost a month with the chaos that occurred during the civil unrest in KwaZulu-Natal and Gauteng

In the March edition, IM made a long Combined Motor Holdings (CMH) short Motus Holdings recommendation as a play on its expectations for the SA motor retailing and vehicle sector.

IM does not often review past recommendations, but in this case it felt the recommendation needed an update.

Since the call, the recommendation has played out as IM expected.

In the period to the time of writing, CMH is ahead 64% relative to a 15% rise in Motus — a material outperformance.

CMH has risen from R16 to R26.19 and Motus from R88.50 to R101.60 as IM writes this update.

Despite the substantive run in CMH, IM continues to recommend this strategy and remains long on CMH.

Our premise for the March recommendation was the material underperformance in CMH versus the sector, as IM believed the market had not fully cottoned on to the restructuring CMH undertook swiftly last year as an adjustment to the pandemic.

Year-end results to February 2021 for CMH saw revenue slashed by 23% to R9.6bn and operating profit decline 17% to R345m.

Headline earnings per share (HEPS) fell 10% to 230.4c per share.

This solid result was attributable to the prompt action CMH’s management took to cut costs and pare back certain divisions such as car hire to adjust to the tougher trading environment because of Covid.

Commendably, CMH paid a final dividend of 125c per share and its cash on hand in the period rose 14% to R755m, or the equivalent of R10.09 a share.

On the original IM recommendation in March, CMH had 59% of its market value in cold, hard cash. It was a bargain.

As a solid and reliable 50year-old business still run by its 74-year-old co-founder and CEO, Jebb McIntosh, CMH, relative to Motus, was, IM believed, undervalued.

Motus also had a great results period to June 2021, but it’s all about timing.

For its 2021 year-end, Motus saw a 19% rise in revenue to R87bn and 78% improvement in operating profit to R3.8bn, with HEPS rising 298% to 1,179c a share. A 415c final dividend was paid.

For both these companies timing is the key.

With a February year-end, CMH took the ravages of Covid, while with a June year-end, Motus was also hit but had a period of recovery in its base as the market returned to some semblance of normality as restrictions to trading were lifted.

This will also play out in the forthcoming interim results.

CMH, with an August reporting period, will have lost a month with the chaos that occurred during the civil unrest in KwaZulu-Natal and Gauteng which affected trading. The third wave of the pandemic also had an effect.

Motus was also hit in this period, but with a December interim period, the first month of its new six months will be hit and these numbers still need to be recovered and reported on.

CMH will have the July civil unrest in its base and, all being equal, depending on lockdown restrictions, will have a much better second half compared to its first half.

CMH’s recent trading update to August indicated a much better-than-expected reporting period, despite the July riots. HEPS were expected to decline 14% to a range of 190c-210c, which is commendable given the 2021 year-end HEPS level of 230.4c a share.

IM expected a good trading update, having visited the CEO for an update in the months prior.

On the news, the market soared 13% and CMH has been trending higher since.

CMH has much going for it. As inbound tourism starts to reawaken, its First Car Rental division, already recovering with a rise in domestic movement and vehicle rate increases, should see further operational and profit benefits.

On the new vehicle side, Nissan and Ford have new vehicle launches and those marques are important to CMH.

The affordable range of Suzuki vehicles is also proving to be popular in these leaner economic times.

However, CMH commented that its consumers are trading up to higher-value vehicles, and thus better margins are being seen in the new vehicle division.

The used-car market remains buoyant as the tight supply of new vehicles due to the global semiconductor chip shortage is throttling production output and driving usedcar prices higher.

IM expects CMH to report a bumper set of FY2022 results and there are whispers that CMH’s cash pile, which has grown, may see a glimmer of a special dividend.

Overall, the picture remains rosy for CMH and at R26.19 IM maintains its standing buy recommendation with a R35 target price or +34%. ●