Despite a revenue loss of R360-million following the closure of two large dealerships during the year, investment holding company Combined Motor Holdings (CMH) recorded an increase of 2.6% in total revenue to R11-billion from R10.7-billion for the company’s financial year ended February 29.

The group also recorded an improved operating profit of R372.9-million, compared with R326.1-million achieved in the last financial year.

CMH CEO Jebb McIntosh said on Tuesday that he believed the group’s performance was “excellent”, bearing in mind the challenging trading and economic conditions that it faced during the year under review.

He said that, despite a 5.2% decline in national new vehicle sales, the group recorded a 27% increase in headline earnings per share (HEPS).

“We learnt harsh lessons during the global and local recession of 2009, most importantly, the need to manage costs and cash flow in a shrinking market,” said McIntosh, adding that applying these principles had enabled modest growth in both the new and used car sectors.

“This growth, together with improved operating margins, has propelled CMH to a return on shareholders' funds of 32.6%. The recommended dividend of 85 cents per share is 30.8% above that paid last year,” he stated.

McIntosh noted that the company’s gross margin declined from 16.3% to 15.8% owing to pricing pressure, but explained that this was offset by a 2.6% reduction in selling and administration expenses.

The result was that operating profit, before goodwill impairment, increased 10.9% to R395-million. After eliminating the goodwill impairment charge of R22-million, which related to the closed dealerships, the operating margin improved from 3.3% to 3.6%.

Adjusting for the lower average number of shares in issue, the 10.8% headline earnings increase to R202-million translated into a 27.2% improvement in HEPS, McIntosh pointed out.

Meanwhile, the proposed dividend of 85c a share, coupled with the 46.5c paid in December 2015, reflected an increase of 34.9% over the comparative period.

“Despite the investment of R251-million on the share repurchase, and the payment of R97-million in dividends, the group ended the year with cash resources of R498-million, up R48-million on the previous year,” noted McIntosh.

PROSPECTS
McIntosh warned that the year ahead was expected to be “extremely challenging” and dominated by higher interest rates, a further rise in unemployment levels and political uncertainty.

“The political spectrum has been rocked in recent months by allegations of indecisive leadership, infighting and undue influence by members of the private sector, all of which have a negative influence on business sentiment.”

McIntosh added that social tension, driven by perceived inequalities, was high and that the likely downward adjustment in the country's sovereign credit rating, which would mean higher interest rates for the country and consumers, would only be averted by “tangible signs of fiscal discipline”.

“A positive is that the government has recommitted to the implementation of the National Development Plan, which will encourage investment growth and employment,” he highlighted.

Further, McIntosh believed that there would be a number of changes within the motor industry.

He said that motor manufacturers would benefit from the depreciating rand to boost export sales and offset their rapidly rising import costs.

However, he pointed out that, last year, manufacturers overestimated the market size and built more vehicles than needed. As a result, they and the dealer networks offered generous incentives to boost volumes and clear inventory. This helped shield the market from price increases that should have followed the currency decline.

McIntosh said it was unlikely that these special deals would be repeated to the same extent in 2016 and, consequently, there would be average price increases of between 12% and 15%, compared with the 6.5% average price increase in 2015.

“Price increases, coupled with expected interest rate hikes, have led economists and the National Association of Motor Manufacturers of South Africa to predict a fall of 9% in national new vehicle sales,” he stayed.

McIntosh further remarked that, at a group level, the pain of closing sub-performing operations over the past two years would enable strengthened focus on the viable outlets.

“The closure of the BMW dealerships will reduce the CMH’s representation in the high-value market sector, which is expected to decline more sharply than the middle and entry-level sectors, where we are strongly positioned.”

The group had learned from experience that new vehicle sales were not the only source of revenue in a motor dealership, said McIntosh. “As the pricing gap between new and used vehicles grows, so does the demand for quality used vehicles. A focus on this area during the past three months has led to a 20% year-on-year increase in sales volumes,” he noted.

He highlighted that parts and service levels continued to rise and that the group had strong follow-up systems to retain customers after their warranties expired and they were no longer tied to the manufacturers' dealer networks.

He enthused that First Car Rental – a wholly owned subsidiary of CMH – was “well positioned” for growth, both in the local business and leisure sectors, and that it would take advantage of the expected increase in the foreign inbound market.

“Continued steady improvement is expected from the financial services segment. Together, these segments contribute 32% of the group's profit before taxation,” McIntosh emphasised.

He added that the group had a healthy balance sheet and a capable and experienced management team. It was also a strong cash generator.

“The principal manufacturers represented are sound long-term operators in the South African market and we have a mutually beneficial relationship with them.

“On this basis I believe CMH will emerge favourably from a difficult year,” McIntosh concluded.