Combined Motor Holdings (CMH) has been a firm favourite of IM for some time. Twice in 2021 we recommended the stock and again in February’s Trade of the Month. It has nicely outperformed.
IM expected a stellar FY2022 trading update and was proved correct when CMH released a blockbuster February trading update indicating that headline earnings per share (HEPS) would rise between 70% and 90%.
At the end of March an even better trading update was released indicating that HEPS would rise between 110% and 120%.
IM’s faith in CMH was justified. Year to date the stock is up 15% and on a one-year basis up 48%.
Despite Covid, the July unrest and supply chain challenges, CMH pulled astonishing results out of the bag. Its seasoned CEO, Jebb McIntosh, said he was “delighted with the result and believed there would be FY2023 growth (if at a more subdued level) on even this best-ever group result”.
FY2022 HEPS were at the upper end of improved guidance at 501c per share (up 117%) with the final dividend of 225c per share nearly equal to the FY2021 earnings. Total dividend for the year was 335c, which, at the current share price of R28.49, places the counter on a p:e of 5.7 times and a dividend yield of 11.7%.
The improved performance came from all divisions, with the easing of Covid restrictions having a profound impact on CMH.
Despite tight global supply of new vehicles due to supply chain issues and semiconductor availability, CMH’s wide platform of brands — supported by more affordable and available models in the Suzuki and Haval ranges — countered supply difficulties in higher-end marques, especially Ford and Nissan.
When the pandemic hit in 2020, CMH was first of out of the blocks to cut costs across many business units, and that leanness paid off as sales improved, leading to operational leverage as economic recovery ensued.
CMH’s move to offer multibrand franchises, where branch and servicing costs could be shared among many manufacturers, helped contain costs. Retail vehicle revenue rose 28% to R10.5bn and operating profit 42% to R426m.
CMH has picked up a number of new vehicle brands to add to its wide portfolio
The real star was First Car Rental. The vehicle rental industry was deeply affected by the slump in overseas tourists. By the time restrictions had eased, many car rental companies had either exited the sector or curtailed their fleet.
First Car Rental business had trimmed its cost base, and a judicious link with airline FlySafair, one of the few that kept operating during Covid, kept the business humming on what domestic travel there was.
When overseas tourists started returning to SA, the division minted money. For the period revenue rose 92% to R466m but operating profit increased by 393% to R146m.
A buoyant second-hand car market, aided by tight supply of new vehicles, led to a bonanza for those in the sector, including CMH.
CMH remains upbeat on prospects. It expects a 10% rise in new car sales in the year ahead and solid demand for car rental as tourism recovers. But it’s cautious about the second-hand car market.
New vehicle margin and car rental average daily rates are expected to normalise, but increased volumes off a leaner cost base will deliver good profit growth, according to management.
CMH has picked up a number of new vehicle brands to add to its wide portfolio, including Mitsubishi, Peugeot/Citroën and Cherry, and got the rights to the Proton brand. These are in the more affordable categories and should perform well in cash-strapped SA.
Proton, which is produced in Malaysia, is owned by the Chinese vehicle giant Geely, now the seventh-largest vehicle manufacturer in the world. Much of the Proton drivetrain was derived from Volvo, also owned by Geely.
CMH says buyers of Proton will gain the premium vehicle experience of a Volvo but at the more affordable Proton price point. It estimates that 3,000 Proton cars could be sold.
With SA consumers tightening their belts, affordable vehicles are gaining traction in the market, and CMH is well represented in that segment.
Despite bumper results and a positive outlook for the new financial year, the stock, after a nice run, is holding steady at R28.49. IM sees opportunity.
CMH sits on a fat cash wallet of R818m — 38% of its current market capitalisation of R2.136m. The board had considered a special dividend, something IM has called for.
But with opportunities to grow the business by increasing its car rental fleet, launching several new brands and establishing a footprint for Proton — all said to cost about R600m, according to management — any special dividend thoughts have been deferred to another year.
Overall the picture for CMH remains bright, with management confident of growth despite a much higher earnings base.
On a highly attractive p:e and dividend yield IM has no hesitation in maintaining its buy on CMH with a standing target of R35 (+23%).
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