Slight acceleration in a tough market for Combined Motor Holdings

Car dealership giant Combined Motor Holdings (CMH), which sells brands including Honda and Land Rover, managed to record the slightest acceleration in interim profits despite a further deterioration in trading conditions in the new vehicle market.

In results to end-August released on Wednesday, CMH CEO Jebb McIntosh said the national new-vehicle market continued the sideways cycle that had been in place for the past 2-3 years.

McIntosh said this was not surprising since the local economy had suffered the after-effects of years of corruption and mismanagement and the advent of a technical recession with falling exchange rates.

CMH did, however, record a 9% gain in revenue to R5.57bn. McIntosh explained that sales levels had been sustained by a negative movement in real new-car prices and robust sales incentives.

But he indicated that a consequence of negative new vehicle pricing over the past two to three years had been a sharp downward adjustment in the value of used vehicles — particularly in the luxury segment. “This has created pressure for customers who wish to trade-in and recycle their vehicles every three to four years.”

CMH sells  Jaguar, Land Rover, Mitsubishi, Volvo, Honda, Isuzu, Opel, Subaru, Ford, Mazda, Toyota, Lexus and Nissan.

The group recorded the increased revenue at a lower gross margin of 16.3% compared with the 16.6% achieved last year.

Bottom-line profits came in at R96.2m (last year: R96.1m) with headline earnings edging up to 129c per share (128c per share). The interim dividend payout was pegged at 61c per share, covered roughly twice by earnings.

The dividend was underpinned by strong cash generation by CMH. Cash generated from operations topped R222m with net cash generated coming in at R187m.

In the new vehicles sales segment, McIntosh disclosed that CMH managed a 5.6% increase in sales against the backdrop of flat national sales.

He said the increase in the group’s luxury model sales were pleasing – especially after the segment suffered declining trends over the past three years.

But, he reported that used car unit sales declined 1.7% in the interim period. “Longer periods over which vehicles are financed, coupled with the fall in their residual values, has led to a greater gap between the resale values and the finance settlement values.” McIntosh said adjustments had been made to ensure that CMH’s inventory was realistically valued, with the past two months producing positive outcomes.

McIntosh said CMH’s parts and service departments recorded steady collective improvement, while the car hire division had been forced to retain its vehicles for longer periods.

He said cars were rented out at a lower daily rate because the fall in used vehicle values had left the retired fleet less saleable.

McIntosh stressed that directors were confident the car rental fleet was conservatively valued, and anticipated an improved performance during the summer months. But he said  the financial outlook for the short-term future remained fragile.

McIntosh maintained that CMH would have performed well if it is able to maintain headline earnings growth for the full year to February 2019.

Ricco Friedrich, a portfolio manager at Denker Capital, said that flat earnings in the prevailing economic climate were a respectable outcome. "CMH remains a great cash generator with high returns on equity and a great dividend track record."