Few sectors have been hit as hard in the weak economic environment of Covid-19 in SA as car rental and vehicle sales.
The long uphill battle facing the automotive retail sector has stalled investor sentiment.
The shares of the two pure motor retail players on the JSE, Combined Motor Holdings (CMH) and Motus, have dropped 43% and 65% respectively year to date.
At R12.40 CMH has a market value of less than R1bn and Imperial spin-off Motus a valuation of R5.5bn. It’s a 1200 versus a V8 … though the smaller, nimbler player appears to be navigating the Covid potholes better.
CMH opened in 1976 via a merger of independent motor dealerships. The company listed on the JSE in 1987.
CMH has a nationwide footprint of dealerships under 19 franchise brands. The largest is Ford followed by Nissan, Mazda, Volvo and Toyota. The first car rental business opened 17 years ago and has 7000 vehicles in the fleet.
It’s been a tough three years for CMH, with rising revenue offset by tightening sector margins. Profitability and earnings have declined since their peak in 2018 — but dividends have remained strong given management’s large stakeholdings.
CMH — despite a diversified portfolio of franchise vehicle brands — has earned a reputation for running a lean operation. Its strong cash position, R660m pre-Covid, has ensured a growing dividend even in slower times. The current dividend yield is 6.8%, even with the final dividend skipped.
But that’s all history now. During the economic lockdown consumers hunkered down in their homes, which hit new car and used car sales as well as service centre volumes. A ban on travel hit car rentals.
CMH took action promptly, slashing operating costs and downscaling operations. It has come out of the starting blocks faster, according to CEO Jebb McIntosh. By June the business was right-sized when larger competitors were still flailing.
CMH lost seven weeks of trading due to the lockdown rules. To counter, CMH management retrenched 30% of their staff. This is significant since the wage bill accounts for 70% of all CMH costs.
The car rental unit was rationalised the hardest. Staff cuts were severe and there was a 25% reduction of fleet (after an 8% trim in the previous financial year).
At CMH’s recent AGM, McIntosh said vehicle sales in June and July returned to some semblance of trading normality. Sales were running at 60%-66% of "normal" — though management had growing concerns that a full recovery would take far longer than they had initially hoped.
IM is not bullish on car retailing. There are simply too many economic headwinds, now worsened by the after-effects of the Covid lockdown. That said, the companies able to ride out the storm will be those with the leanest cost bases and financial firepower on the balance sheet.
CMH looks like it has the cost efficiencies to cope with the weaker trading environment. It has a sizeable cash pile — equivalent to 70% of its market value or near R9 a share.
CMH’s management team not only has vast motor sector experience, they also has plenty of skin in the game as owners of 44% of the business.
Overall, the business is solid and is trading on a modest earnings multiple. This may attract buyers such as rival companies or private equity.
With a share price of R12.40 and a net asset value (NAV) of R10.90, CMH offers value as a motor sector survivor.
IM would be a buyer — but given the cautious comments at the AGM, it might be prudent to wait while the motor sector re-starts its engines.