This month’s IM trade of the month could be seen as contentious, especially because Motus, the renamed former Imperial vehicle retailing business, is revving close to a 52-week high.
Comparing Motus, with a market capitalisation of R16.7bn, against its smaller sector peer Combined Motor Holdings (CMH) — which has a market value of R1.2bn — is a bit like pitching David against Goliath. But we know how that story ended.
The vehicle and motor retailing sector was hard hit during the Covid-19 pandemic in 2020 with year-end results from the sector heavily affected by dealer network closures forced by the lockdown imposed during the pandemic. Before the lockdown, the consumer environment was pretty much stalled too.
For financial 2020, Motus recorded an 8% decline in revenue to R73.4bn with operating profit falling 41% to R2.1bn and headline earnings 70% to 296c a share. Motus were caught in the thick of the pandemic — with the second half of its year to end-June badly infected by the pandemic lockdown.
Smaller rival CMH — with a February 2020 year end — reported flat revenue to R11.2bn with operating profit slipping 7% to R417m and headline earnings coming off 11% to 255c a share.
Unlike Motus, which carried hefty debt at the time of results and a much higher operating costs base, CMH was debt free and had net cash of R660m — equivalent to nearly half its market value at the time.
During the early part of SA’s Covid-19 crisis, CMH was quick in slashing costs, cutting back the car rental business and reducing stock and inventory. As a nimbler management-owned business it came out of the blocks first.
So why does IM recommend a long CMH and short Motus position as a viable trade? Simple — IM reckons CMH has more road left for recovery in the short to medium term than Motus.
Let’s unpack the businesses.
Unbundled from Imperial Holdings in November 2018, Motus is the largest importer of vehicles into SA with well-known brands such as Hyundai, Renault and Mitsubishi. It also distributes parts. Motus has the largest branch network of motor retailing dealerships, covering 23 brands over 350 branches in the country.
The stock traded in the R70-R90 range for 2018 and 2019, and then during the Covid-19 sell-off in March 2020 it drove off a cliff and crashed to under R30. The share traded there until the spectacular rally from September 2020 started running, taking the share price back to the R88.50 level.
A series of voluntary updates indicated a more positive trading environment for Motus. The recently released interim results to end-December reflected revenue growth of 6% to R44.3bn. But there was a 6% fall in operating profit as lower car rental income, the trend of trading down to smaller vehicles and a move to more affordable car parts hit the company.
Headline earnings, though, were up 6% to 507c a share.
The market lapped up the interim numbers, and Motus’s shares have accelerated 54% in the past three months.
CMH, on the other hand, had a more subdued share price performance — rising a modest 7% over the same period.
In fairness, much of the contrasting sentiment has to do with the timing of results.
The Motus results and narrative have clearly articulated that recovery in the automotive retail sector is under way and the positive statements by the company’s executives aided the share price rally as the market looks ahead into financial 2021. Understandably, Motus is now almost back to its pre-Covid levels.
CMH, at R16, remains 30% below its pre-Covid-19 peak despite a more robust operating performance as well as an aggressive cost cutting and restructuring programme (which should come through in its February 2021 results). A CMH trading update should be published in early April.
IM believes the swiftness on realigning the CMH business model has not been fully factored into the group’s recovery equation by the market.
What’s more, as a small cap that is tightly held and barely covered by analysts’ columns it might take longer for the market to latch on to CMH’s recovery prospects. But if the recovery is as upbeat as expected, IM expects a sharp re-rating in the counter. This won’t be difficult since CMH is currently on an earnings multiple that is less than half of the rating accorded to Motus.
For those prepared to take some profit off the table at Motus at current levels and switch into CMH, there could be a decent short-term rally when the latter gives the market a look at its profit growth speedometer in a few weeks.