Investment holding company Combined Motor Holdings (CMH) on Tuesday reported a good set of results for the financial year ended February 28, despite ongoing challenges including a difficult economic, trading and political environment.
The company’s operating profit increased by 15.5% year-on-year to R438.4-million, with a commendable improvement in the operating margin, before goodwill impairment, from 3.9% to 4.2%.
Revenue growth was restrained by limited vehicle price increases, as manufacturers fought for market share, and the continuing downward trend of sales within the luxury vehicle sales segment.
The net result was a 25.4% increase in total profit and, adjusting for the reduced good impairment this year, a 17.2% year-on-year improvement in headline earnings.
Additionally, dividends paid during the year reflected a 15% rise, and the directors have recommended a June 2018 dividend of 115c a share.
The results were driven by a strong performance by CMH’s core retail motor sector – an area which is particularly sensitive to depressed consumer confidence, the effects of an economy that grew by only 1.3% and a downgrade by major credit ratings agencies, as well as a new-vehicle sales market that grew by a mere 0.4%.
The financial year began with low consumer and international investor confidence following the “irrational and politically motivated” decision, in March 2017, by former President Jacob Zuma to fire the respected former Finance Minister Pravin Gordhan, who has since been appointed Public Enterprises Minister in President Cyril Ramaphosa’s Cabinet.
This decision created a severe negative period during which corporates, in particular, suspended capital goods purchases, said CMH.
Additionally, State capture allegations, endemic corruption and mismanagement at State-owned entities dominated the headlines, also affecting the vehicle sales market.
“Looking back, the past six years have been challenging, yet rewarding. CMH has achieved 18.5% compound growth in headline earnings a share, and a 24.5% growth in dividends,” reported CMH CEO Jebb McIntosh.
He added that cash flow generation has enabled two share repurchase transactions, to a combined value of R450-million, and enabled the early settlement of R200-million of car hire fleet financing.
Meanwhile, against the 0.4% rise in national new-vehicle sales, CMH achieved growth of 11.8% in terms of motor retail. This improvement was driven mainly by
Toyota, Nissan, Honda and Mazda products.
The luxury market continued its declining trend. Sales in this sector fell 8.1% during
the year, and have declined by a third over the past three years.
Fortunately, the luxury brands form a relatively low proportion of CMH’s model mix; however, the Jaguar, Land Rover and Volvo dealerships experienced a difficult year.
The growth in new-vehicle sales has not translated into significant revenue growth because the model mix of sales has trended towards lower-priced, more affordable options.
CMH was, nevertheless, able to achieve the majority of manufacturer sales targets, and the incentives earned helped boost gross margins.
Moreover, the company also reports good car hire sector figures. First Car Rental has completed a decade of profit growth since its rebranding in 2008. In that first year, the division's operating profit was R18.6-million – 6% of the CMH total.
In the year under review, this has risen to R64.2-million – a 19% contribution.
The division faced severe headwinds during the middle of 2017, when the traditionally slow winter months were exacerbated by a period of political turmoil, and lower inbound tourist numbers.
During the summer months, from November onwards, the division substantially
increased both its fleet use rate and rental income per day, and focused on driving down costs.
The used car market remained buoyant, enabling that division to obtain favourable prices for retired fleet vehicles.
In the year ahead, McIntosh expects South Africa’s economic growth to improve on that of the past three years, provided the global backdrop remains supportive.
It also seems likely that political uncertainty will moderate, and a few interventions to restore confidence will serve to ease some of the constraints on both investment and consumption, he noted.
“The reality check will come over the next few months when Ramaphosa begins to deal with public sector wage negotiations, prosecution of corrupt present and past government officials, land redistribution pressure and the state of disarray at the State-owned enterprises,” he pointed out.
McIntosh said the recent hikes in value-added tax, ad valorem duty and carbon emissions tax – all necessitated by government mismanagement of finances – will negatively affect the motor industry.
However, he remained optimistic that a “new dawn” has broken and that modest economic recovery lies ahead.
“Economists are predicting a 3% to 5% rise in new-vehicle sales, and this will provide a welcome stimulus for the industry,” he concluded.