JSE-listed Combined Motor Holdings (CMH) recorded a 51.5% increase in headline earnings a share to 183.9c for the year ended February, boosted by net finance charges that grew by 26% off a low base and a reduced tax rate of 24%, down from 27%.

This represented a 25.4% return on shareholders' funds, compared with a 20.8% return the previous financial year. The figures included a one-off receipt of R21.2-million in dividend income, which accrued as a result of the change in the taxation of dividends and would not be repeated.

A dividend of 50c a share would be paid to shareholders on June 18.

CMH stated that improved gross margins and tight control over selling and administration expenses resulted in an 8.2% increase in revenue that converted into a 35.3% improvement in operating profit. The operating profit margin, before impairment of goodwill, had improved from 2.6% to 3.4%, notably above the industry average.

During the year under review, the group used a portion of its cash resources to reduce the level of interest-bearing trade liabilities in the retail motor and car hire segments.

Further, the company stated that its working capital levels had increased as expected, adding that this was in line with increased activity levels, while its current ratio and asset-test ratio remained comfortable.

CEO Jebb McIntosh said the year was characterised by uncertain global and local economic conditions, with moderate growth in the segment in which the company competes.

“During the year, a number of the strategies and structures implemented in 2010 and 2011 bore fruit and the outcome was a remarkable result during an unremarkable economic period,” he noted.

In its retail motor business, the company reported a 9% increase in national new vehicle sales, which was on par with the national increase of 9%. However, this came at the expense of the used car market, where volumes rose disappointingly by only 4%.

Nevertheless, overall selling margins improved and, with an increase in the marketing of after-sale products, both departments made significantly higher profit contributions.

The group's parts and service departments recorded an increase in revenue and profit. In addition, public awareness of CMH’s ‘Carshop, powered by the CMH Group’ brand had grown and currently generated over 50% of the company’s sales leads.

“Because the country has no effective public transport system, the purchase of a vehicle is for many a necessity rather than a luxury. Although the average finance and replacement cycle has increased from 28 months to 44 months in recent years, the longer period does provide workshop and replacement parts opportunities,” McIntosh stated.

In the hire department, rental days increased by 11%, against an industry average of 6%. Vehicle write-off and damage costs were reduced following a focus on quality business rather than chasing volume, and the fleet-use rate improved.

The group’s marine and leisure division showed disappointing results, which it said reflected the extent to which the leisure market was still being affected by the depressed economic conditions.

CMH had turned its focus to the wholesale side of the marine and leisure business and had decided to offload its two retail outlets. To this end, the Cape Town branch was sold during December and negotiations were in progress to sell the Randburg outlet. This was anticipated to reduce the division's cost base and working capital investment.

FINANCIAL SERVICES

Profit from the insurance cells declined by 22%, owing to a higher-than-usual claims ratio, but the 50% increase in premium collections reflected the growth in policies written and augured well for the income stream over the next three to five years, CMH said.

Further, prior year losses in the joint venture finance operations have been eliminated and these operations were expected to show significant profit in the year ahead.

PROSPECTS

McIntosh said the motor industry wage negotiations, which begin in June, could, if not hastily resolved, result in supply disruptions.

“In Gauteng, the ill-conceived toll road system will be both a financial burden for motorists and an administrative challenge for the car hire division and local dealerships. The car hire division will need to recoup toll fees from hirers but will not have timeous access to information from [the] South African National Roads Agency,” he added.

However, McIntosh said the general view was that national new vehicle sales would grow by between 3% and 5% next year, depending, in large part, on the economic climate, the degree to which anticipated further hikes in rates and utility costs reduced disposable spending, and the appetite of banks to continue growing their lending books.

While the weakening of the rand would feed through to vehicle price inflation, it was expected that an increased gap between new and used car prices would give a much-needed boost to the used car market. 

“I believe the year ahead will be one of slow economic recovery. However, the group is in a strong position to continue its recent earnings trend and achieve its growth budgets,” McIntosh said.