Combined Motor Holdings (CMH) has, as on many previous occasions since the vehicle dealership group was listed in 1987, released financial results that were robust in the face of a grinding trading environment. For the CMH management team, which has been around for so long, it probably feels like business as usual.
It might be useful to tick off the high-level group results before looking under the hood for the various divisions in the company. Revenue was up a chunky 18% on the year before, and with the usual tight cost control that the group is known for, this translated into a 33% jump in headline earnings.
It is worth mentioning that a buyback was conducted during the year, which obviously helps the earnings figure but also caused a slight distortion to the dividend paid out for the full year. The interim dividend was skipped as the funds were allocated to the buyback.
So total dividends year over year are down 47%. A more apples-with-apples comparison is to look at the final dividend, which was 222c a share vs 171c a share the year before. That is a 30% increase, and says much about the year just gone and management’s confidence in the business’s outlook over the next 12 months.
Pop the bonnet open and investors will see that the biggest segment of CMH, the motor retail and distribution business, had a stellar year. A combination of positive macrofactors, such as falling inflation and interest rates and an all-around improving economic outlook in South Africa, led to a 23% increase in new car sales and a more than 8% rise in used car sales through its various showroom dealerships and distribution channels.
CMH has been savvy in offering a wide range of badges across its dealership mix while not shying away from market changes brought about by the emergence of Chinese and Indian brands in the South African motoring landscape. The group has Chinese brands such as Haval, Chery and Foton, as well as Mahindra from India. It also has traditional brands that still largely resonate with and are loved by South African consumers, including Toyota, Ford and the group’s top seller, Suzuki.
Management’s ability to react to these dynamic shifts in the marketplace is reassuring — especially as the Chinese and Indian brands are growing. The Mandarin Parts business continues to pick up speed as warranties and service plans for the first generation of Chinese and Indian customers in South Africa expire. This is a segment to watch over the next few years.
CMH has adjusted the useful life of its car rentals, operating more on kilometres driven than on the age of the vehicle
The car hire business had a solid, if slow, growth year. It delivered a marginally improved profit contribution but was well down on the boom travel years seen after Covid. Divisional MD Bruce Barritt says the car rental business has fully normalised since the go-go years after the pandemic. Overall, this division accounted for 29% of the group’s profits. The business has now fully transitioned to its First Car Rental brand and away from its legacy Sixt partnership.
CMH sees opportunities to grow the rental brand across the SADC region. It is also looking at expansion opportunities at some of the more popular regional airports, with plans to open a desk at the new Cape Winelands Airport once it opens for business. It has already opened a desk at Hoedspruit airport, which is performing well and will help inform decisions about further regional airport opportunities.
CMH has adjusted the useful life of its car rentals, operating more on kilometres driven than on the age of the vehicle, according to Barritt. The result is that the useful life has stretched out from 12 months to the perceived industry standard of 15 to 20 months. CMH believes competitors are starting to adopt a similar model. It probably says something about the quality of your operation when you are setting the standard operating model for the industry.
The financial services business and corporate services divisions contribute the remaining 22% to group profits. The financial services side naturally benefits from increased vehicle sales in the motor retail division, as this generates new financing and insurance commissions. These sales generate nice, long-term annuity-style revenue for the business, so the benefits of good sales in this and the previous year will still be felt in future years.
Moving from the profit and loss statement to the balance sheet, investors should be fascinated to see CMH’s cast-iron balance sheet, with more than R1.1bn in cash, and no debt. At the analysts’ presentation after the results Jebb McIntosh, the long-time CEO, said CMH needs roughly half that cash to operate the business comfortably.
Many analysts raised questions about the cash pile and what will be done with it, as it is likely yielding only 4.5% after taxes, which is suboptimal. There were suggestions of continuous share buybacks targeting 3% of shares on issue annually and of buying properties where the company’s dealerships operate to secure sites and to reduce rental costs over time.
McIntosh acknowledged that the board is working on plans to reallocate cash to growth opportunities in the business and across all its divisions, and with about R500m, it certainly has plenty of fuel in the tank.
A special dividend and share buybacks were ruled out in the accompanying presentation deck, but both these options should remain live for the board to consider, given their ease of implementation and the overall positive impact on shareholder total returns.
McIntosh says he is hopeful that concrete details of the company’s capital allocation plans can be shared with the market via a Sens announcement in the next six months.
We wait for the satin reveal cover to be drawn off this announcement, and hopefully there will be something nice with a bow on it for shareholders to take home.
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