Zeda’s share price is cheap. The problem is that it’s been cheap for a while.
Now trading at an earnings multiple of 3.6, this stock is in real danger of falling into the value trap bucket for an extended period. Those who have been on the wrong end of a value trap will tell you that being early is the same as being wrong, thanks to the time value of money and the opportunity cost of capital being tied up in a sideways stock for too long.
This is why investors who look at value stocks try to identify potential catalysts for a rerating. High returns are achieved through a combination of earnings growth and an uplift in the valuation multiple, with the latter usually making the difference between an average and an outstanding investment.
The disappointment with Zeda is that the market has shrugged off reasonable catalysts such as an improved balance sheet (previously seen as the main risk) and even the commencement of dividends, which gave further support to the narrative of an improved balance sheet. It’s becoming difficult to see meaningful catalysts beyond those options, with the stock now in the slow grind phase of needing to deliver earnings growth year after year to get the market to place greater value on the earnings.
Now comes the next problem: the broader market story. Zeda may not sell new cars, but it isn’t immune to the pressures and disruptive forces in the industry. If you’re sitting on a fleet of cars that are at risk of having far lower resale value than your economic business model initially predicted, that’s a looming concern.
Zeda may not sell new cars, but it isn’t immune to the pressures and disruptive forces in the industry
To further compound the risks, Zeda has its own car sales business to help manage the vehicles that have reached the end of their rental life cycle, so there are essentially two profit pools at risk: the lifetime value of the vehicle to the rental business, along with the typical margins on the eventual sale that would’ve been earned by someone else in the absence of vertical integration.
The changing shape of the motoring industry feels like it’s only just warming up, with question marks around the true depreciation cycle of the vehicles. Aside from factors such as changing consumer preferences, there’s also the risk of new Chinese models offering strong value for money compared with used Japanese and Korean cars (among others), putting further downward pricing pressure on used vehicles both now and in the future.
The uncertainty in this space is probably why the market is taking a wait-and-see approach. This is despite interim earnings that were solid overall, other than the obvious pressure on revenue. For the six months to March 2025, a drop in revenue of 1.6% was navigated so successfully by Zeda that it achieved a 16% operating margin and 11% growth in headline earnings.
Return on invested capital was 12.2%, which remains ahead of its weighted average cost of capital of 11.8%. The use of leverage (that is, debt) means that it achieved a 22% return on equity, which is a strong outcome to say the least. And on top of this, the dividend increased by 10% to 55c.
If you dig deeper, there are cracks showing. The leasing business may be doing exceptionally well right now, but the rental business is struggling with a drop in revenue and a decline in the earnings before interest, tax, depreciation and amortisation margin. On the plus side, the utilisation rate in the fleet moved higher and subscription volumes are right, so management is focused on building more resilience into the model.
The market will watch the debt ratios carefully. In the 2022 interims, the net debt-to-fleet value ratio sat at 80%, a high-risk situation. In the latest period, this ratio has ticked up from 60% to 66%. That’s still a long way off where it used to be, but the trajectory is of concern even if interest rates have dropped and interest cover is therefore better than the comparable period.
With Zeda trading on a dividend yield of about 8.5% on a last-12-months basis, the key mitigating factor in this potential value trap is that investors are at least being paid to wait. And with volatility like a 52-week low of 950c and a 52-week high of R15.05, there’s something for the traders too.
All that management can do is focus on delivery — and keeping the balance sheet in line, of course.
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