After another busy week of earnings on the local market, it can be hard to pick out just one or two stories. There really is so much to write about, which is why top investors will spend more time reading than doing anything else. But even in such a busy week, Motus stood out as a story of a company fighting against the impact of disruption.
This is an interesting group, with exposure to the UK and Australia in addition to South Africa. The company is the market leader in South Africa in new vehicle sales, responsible for the sale of one in five new passenger vehicles on the road. But more on that later.
When there’s significant disruption in a market, the leading companies tend to be the natural target. Sure, niche players can find themselves in trouble, but the good ones can still carve out a competitive position. They already have an innovative and resilient culture due to being a challenger brand rather than a market leader, which arguably makes them more resistant to disruption. Conversely, companies with broad appeal are constantly on the defensive, with competitors yapping at their heels. But when it comes to Chinese cars and the fight for market share in new car sales, it’s less of a yapping dog and more of a fire-breathing dragon.
And let’s not forget WeBuyCars, the group that has done an excellent job of disrupting how South Africans sell their cars. Gone are the days of dealers making cheeky offers to desperate sellers. WeBuyCars has put a floor price in the market on just about every model, taking a slice of the economics in the value chain and making things harder for new car dealers who rely on trade-ins and buy-ins.
Competition is a lovely thing, as the consumer is better off. Such is the beauty of capitalism, the effects of which are playing out in the Chinese domestic car market as well — ironically in a country well known for having its own brand of capitalism that the West struggles to understand. BYD, a name that has become familiar to South Africans, is dealing with substantial margin squeeze thanks to increased competition. It’s easy for the disrupter to become the disruptee!
We don’t know how this will play out in the market or what the steady-state situation will be. But we do know that life isn’t easy at the moment for the leading players, such as Motus. Its market share in new passenger vehicle sales in South Africa has fallen by 150 basis points in the past year, from 21.6% to 20.1%. That slide needs to be addressed as soon as possible, as the South African business contributes 65% of group earnings before interest, tax, depreciation and amortisation (ebitda).
Market share in new passenger vehicle sales in South Africa has fallen by 150 basis points in the past year
The trick Motus has up its sleeve is that its business is about far more than new vehicle sales. It generated 55% of group ebitda from nonvehicle sales, that is areas such as parts, workshops and vehicle rental. Being able to service the vehicle parc (the term used for the total number of vehicles on the road) is helpful, as Motus can generate revenue from its fleet of vehicles while the new car market shakes itself out one way or another.
We can see this trend at segmental level, with aftermarket parts (24% of group operating profit) growing profit at 12%. This makes it by far the highlight in the group right now, particularly when viewed against the 6% drop in retail and rental — the largest segment with an operating profit contribution of 41%.
There’s another interesting trend within retail and rental worth noting: revenue from new vehicles fell 6%, while pre-owned vehicles increased 6%. This tells you something about not just the macroeconomic environment, but also the legacy brands Motus is largely exposed to.
And yet, for all these challenges, headline earnings were up 5%. That’s an impressive result, but be careful — it wasn’t thanks to operating profit, which was flat this year. Net finance costs did the heavy lifting, dropping 13% thanks to a substantial reduction in net debt during a period in which cash flows from operating activities were strong. The company has bravely increased the dividend 6%, a signal to the market that all is well.
But the market share tells us that all isn’t well, so keep an eye on this one. It has a spectacular fight on its hands.
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