Combined Motor Holdings (CMH) can thank its smaller car hire division, First Car Rental, for another strong acceleration in profit in the year to end February, when growth in its core motor dealership business stalled.
On Wednesday, CMH, which owns a brand diverse chain of retail motor dealerships, posted a 23% gain in headline earnings to 617c a share, from a more modest 11% increase in revenue to R12.4bn. This followed a 117% increase in headline earnings in the 2022 financial year.
While car dealerships accounted for 91% of the turnover and car hire just 7%, at a pretax profit level the contributions were nearly equal.
The stoutly margined car hire business accounted for a chunky 43% of pretax profits, more than doubling its contribution to R269m (last year: R115m). By contrast the dealership business saw its profit contribution slump from R336m in the 2022 financial year to R274m.
In the 2022 financial year the profit split between dealerships and car rental was 66% and 23% respectively.
CMH CEO Jebb McIntosh told Business Day that an equal profit contribution from the dealership business and car rental might be the new normal in the financial year ahead. He pointed out the car rental business — which prudently did not panic sell its fleet during the Covid-19 outbreak — was still gaining market share and had enjoyed a good tourism season over SA’s summer months.
“Things quietened down since the end of April, but we think next summer season will be strong again.”
For the year under review, McIntosh pointed out that the daily hire rate improved 16% — which compared positively with the 12% increase in the fleet holding cost.
In his annual review, he noted: “A number of competitors in the industry have restructured and downsized since Covid-19, and this, together with aggressive, but selective, marketing, has created opportunities for growth.”
McIntosh said the average fleet size increased 50% during the year, and the number of rental agreements rose 58% — adding that the group’s marketing alliance with FlySafair had “proven mutually beneficial as the airline dominates the domestic market”.
There was a note of caution, though. McIntosh said the interest rate cycle, which has reached its highest level in 14 years, coupled with new car price inflation would place severe pressure on the daily hire rate:fleet holding cost ratio. “In addition, the collapse in the used car market, experienced over the past four to five months, could negatively impact the margins obtained on the fleet vehicles which are retired in the new year.”
CMH’s dealership business was tricky to navigate. McIntosh said that during the first seven months the low supply of new vehicle stock continued, caused by the Covid-19-driven shortage of some component parts and exacerbated by the Toyota shutdown following the April/May 2022 floods.
“While good margins were made on the low volumes sold, the shortage caused an increase in demand for used vehicles. Car hire and large transport operators were unable to refresh their fleets, and a traditional source of 18-24-month-old vehicles dried up.” He said used car prices soared well above the guide levels.
But from October and November 2022 new stock began arriving with Toyota back in full production. “Within a matter of weeks the used vehicle market collapsed by 15-18%, leaving many operators stranded with overvalued inventory and fewer customers.”
Regarding CMH’s much mooted launch of the Malaysian-sourced Proton range, McIntosh conceded the venture had seen a slow start — coinciding with the depreciation of the rand. However, he believed the Proton project was gaining momentum with a range of “well-priced” Saga saloon vehicles was launched in March.
“It represents one of few models available for less than R200,000. These vehicles have been well received by the likes of Uber, and are ideally positioned as entry level competitors in the car hire field.”
McIntosh added the CMH was also testing the water with the introduction of a range of electric carrier bikes and a small pick-up van. He said both were being evaluated by logistics companies and major retail chains.
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