Despite a difficult year in the motoring industry, JSE-listed Combined Motor Holdings (CMH) on Wednesday said it still achieved “commendable results”, delivering a 17.8% increase in basic earnings a share, a 14.8% increase in headline earnings a share and a 25.6% improvement in dividends a share for the financial year to February 28.

The company said in a statement that tough trading conditions continued to place pressure on consumer spending, with gross profit down 3.2% to R1.68-billion.

The year-on-year decline in gross domestic product, coupled with the volatile economic climate, added to the financial strain on many households and resulted in a 11.4% decline in national new-vehicle sales.

The closure of two BMW and Mini operations in 2015 and a third in June 2016, led to group revenue falling 7%.

Further, the company noted that, despite the investment of R251-million last year in the repurchase of shares, its net finance cost remained almost unchanged.

The group's year-end cash resources balance of R489-million remained sound in line with that of last year. At year-end, R70-million had been used to settle interest-bearing fleet borrowings, and a further R200-million to reduce trade payables relating to new-vehicle purchases.

OPERATIONS
For the third successive year, the national market for new-vehicle sales has recorded a year-on-year decline. The volumes sold are at a level last recorded in 2010 and 2011, and 100 000 units below that of 2014.

Countering, to an extent, the fall in new-vehicle sales has been the improvement in the used vehicle market. “While there are no reliable statistics to verify sales levels, indications from the major vehicle finance houses are that the national market increased by 3% to 4%.

“In comparison, group volumes increased 6.7%. The trend of consumers purchasing used rather than new vehicles has continued,” CMH said.

However, against the national market, which declined 11.4%, group new-vehicle sales, excluding the closed operations, fell 8.3%. Unlike in previous years, the high-value models were also adversely affected, “a sign that even the rich are suffering in the economic downturn”.

Dealers were faced with increased pressure from manufacturers to "move metal". In some instances, dealer margins have been reduced and replaced with more aggressive incentive schemes directed at boosting volumes at subeconomic margins.

Meanwhile, the company noted that its First Car Rental division achieved eight consecutive years of profit growth. Its success has elevated its contribution to 21% of group profit before taxation, “a welcome underpin during a period in which the retail motor division has been under pressure.”

The business recorded revenue growth of 14%, largely because of increased penetration into both the business and tourism/leisure markets.

A change in segmentation mix, with a focus on lower-volume, higher-margin business, has resulted in an increase in the average daily hire rate and an improvement in the profit margin, from 21.5% to 22.5%.

LOOKING AHEAD
CMH said signs of a potential mild recovery in the "fragile economy" were thrown into doubt and confusion by “a few days of political mayhem”, leading to a reversal of the rand's gains, and the downgrading of the country's credit risk rating.

“What is astounding, is the potential for our political leaders, through their actions or inaction, to turn the economy on its head. There are not many countries where political influence can have such a damaging influence on the economy and public confidence as is the case in South Africa.

“Allegations of fraud, corruption, nepotism and incompetence within government circles continue to dominate news headlines. The African National Congress election conference, scheduled for the end of this year, has already split the party into conflicting factions, and the scramble for leadership positions, with the expectation of favours for supporting bodies, has the potential to result in violence.

“Rather than supporting the private sector drive for job creation and prosperity, the government is a stumbling block. Its leaders seem unwilling to accept responsibility for its failures and to replace incompetent and corrupt officials for fear of losing political patronage,” CMH said.

It added that, within the motor industry, the majority opinion is that, after a flat start, national new-vehicle sales will start to gain traction during the second half of calendar 2017, with an improvement of 3% to 5%.

“After three years of decline, this will be a welcome relief.” Further, CMH noted that the availability of good-quality used vehicles with less than 50 000 km travelled will come under pressure as the demand continues. This will drive up prices and spark a natural shift back to the new-vehicle market.

The group's car hire and financial services segments provide 33% of its profit and, unless there is a surge in the motor retail contribution, this underpin is predicted to increase to 35% in the year ahead.

First Car Rental can expect to obtain good prices for the fleet vehicles retired in the year ahead, but will come under some strain when it starts to replace them at prices which are some 15% higher. The business will look to expand its fledgling van and truck hire offering and increase penetration in the medium-term rental market.