TRADE of the MONTH
Some softness is permeating the new and used vehicle sector as higher interest rates bite. New car sales are expected to trim from 2022 levels, and used car prices are also weakening. The silver lining is car rentals, as inbound tourism remains buoyant.
This is the macroenvironment that leads IM to review and update its view on Combined Motor Holdings
(CMH) and Motus Holdings.
On three separate occasions, in March 2021, October 2021 and February 2022, IM has favoured CMH in our Trade of the Month feature. That was the correct call.
There have been periods when Motus outperformed, but since the post-Covid recovery of the domestic automotive new and used sales sector and increase in car rentals, the place to be invested in has been CMH.
Since our original recommendation, CMH has gained 83.6% vs 5.2% for Motus, and that excludes dividends — which CMH pays generously. Its current dividend yield is 13.9% vs 7.6% for Motus. On a p:e basis, both are cheap.
CMH, having recently released its year-end results to February, trades on a 4.8 rating vs Motus, which has a June year-end and is on a current 4.6. Looking at recent results for both counters as well as the current market environment, IM continues to favour CMH.
Both CMH and Motus had sparkling interim results periods. Headline EPS rose 51% to 302c a share for CMH and 13% to 902c a share for Motus. Much has to do with timing, as CMH has a February 2023 year-end and caught the best of the car rental summer season as well as what was still a reasonable market for new and used cars.
Motus will catch some headwinds with its June 2023 year-end in its second half as its business is hit by higher interest rates, a stressed consumer and load-shedding. CMH will have much the same in its new first half, but is more insulated, given its smaller scale and hefty profits derived from car rentals.
CMH’s recent year-end results produced an 11% rise in revenue to R12.4bn with a 22% rise in profit before tax. HEPS rose 23% to 617c a share year on year, and a total dividend of
408c a share was paid.
There was a slide of 18% in profit from retail motor as margin eroded on a tougher segment and owing to a greater availability of vehicles after Covid. This was offset by a 131% rise in car rental profits.
It would be unrealistic to expect an ongoing boom in profits from car rentals. Average vehicle rates will slow, but the company is confident of another buoyant tourist season, which should hold rates, and it aims to have more vehicles in the sector to capitalise.
One difference between the two companies is that CMH sits on a mountain of cash. At its year end that was R762m, or R10.19 a share and 37% of its current market valuation of R2.204m. Motus has cash of
R721m as of its last interim results, equal to R4.06 a share or 4.3% of its R16.609m market capitalisation.
IM highlights this as both companies are inherently well managed and have capable balance sheets. Granted, Motus is a materially larger business, with annual revenues of R92bn vs R12.4bn for CMH, but the cash cushion inside the smaller business provides more comfort.
CMH is tightly held and is seen as a quality small-cap stock. It was co-founded and is still managed by CEO Jebb McIntosh; the septuagenarian has significant sector experience and continues to have his finger on the showroom floor.
Its share price has been range bound for a year, with a high over 12 months of R31.78 and a low of R25. The stock seems stuck in the R28-R30 range. IM considers this narrow trading band as potentially interesting, with a likelihood of an upside break, given the company s
The Motus share price’has better sector prospects. IM’s standing price target remains
R36 (+22%). been in a downtrend since late October and sector prospects both locally and within its international operations look muted, so IM sees no rationale for the stock to rally materially.
The only big difference between the two is that CMH has a major car rental division First Car Rental which is No 3 in market share and nimbleness. The return of tourists to South Africa after Covid has made this division the clear profit driver for CMH.
IM sees that as a key factor that will continue into the 2023/2024 summer season, especially given the attractiveness of South Africa as a tourist destination because of the weak rand. This will offset the weaker new and used car market, thus insulating CMH’s earnings to a greater extent than those of Motus, where IM foresees some second-half pressures on earnings growth.
We maintain our long on CMH and short on Motus.
One difference between the two companies is that CMH sits on a mountain of cash