Combined Motor Holdings (CMH), which operates vehicle dealerships and owns First Car Rental, has more than bounced back from Covid-19 to book its best-ever first-half profit, boosted by global supply-chain issues that have restricted supply of new cars, but also put a shine on margins.
Accelerated efforts to cut costs and dispose of loss-making parts have resulted in a much better balanced business, CEO Jebb McIntosh told Business Day, but a decision not to cut too deep also paid off.
“We didn't panic, we held on to a lot of our stock,” said McIntosh, with CMH also declaring a record interim dividend of 110c per share — a total payout of about R82m.
Overseas Covid-19-related factory closures have caused disruptions in component supply chains, principally from China and India, but this also resulted in a dearth of suitable, well-priced vehicles, and demand for high-quality stock has surged.
Profits pick up
CMH, valued at R2bn on the JSE, reported a profit surge to R149.5m in its six months to end-August, from a loss of R10m the previous year, but also up almost two thirds from the same period of 2019. It did take a hit from the violent riots in July, which McIntosh said affected sales during closures, while staff had been “traumatised” by the events, which had cost the group an estimated R18m in lost profit.
The group, which listed on the JSE in 1987 and operates more than 40 dealerships covering most major brands, generates about 95% of its revenue from motor retail. Revenue climbed 54% to R5.2bn year on year in the reporting period.
The group also saw a recovery for First Car Rental, whose revenue almost doubled to R195m, generating a pretax profit of R45m, from a loss of R25m previously, and up 80% from pre-pandemic levels.
As tourism and travel fell off a cliff in 2020, the group accelerated efforts to cut costs, including through pay cuts, retrenchments, salary freezes and early retirements. It also trimmed its car hire fleet and staff numbers by just more than a fifth.
McIntosh said SA’s overall rental fleet had about halved, while CMH’s was down 24%, and the group had picked up market share. “For the insurance replacement market we picked up a major share from the big players,” said McIntosh, adding the group had netted some other big corporate accounts as well.
CMH said on Tuesday its exclusive arrangement with Safair, “the most reliable airline during these troubled times”, had in part helped the remarkable turnaround for its car hire business, while it is further encouraged by a lifting of travel restrictions to SA by the UK and other European countries.
Supply-chain disruptions
CMH said it expected good results to continue, but the shortage of new-vehicle stock was expected to lessen towards the end of 2021 and the start of the new year.
“However, the current temporary excess of demand over supply has, for some, created the perception that economic recovery has created the excess,” CMH said. “The reality is that national sales levels are substantially behind those of the past decade, and the return of abundant supply will expose the dearth of customers who can afford a vehicle purchase.”
McIntosh said while SA’s vehicle sales were expected to come in at about 450,000 in 2021, from 550,000 before Covid-19, sales should trend towards pre-pandemic levels in 2022.
Indications are that the global chip shortage will persist into 2022, he said, and may take longer to resolve than previously expected. The industry, such as original equipment manufacturers, are being constantly surprised by news that vehicle makers had opted to temporarily halt assembly lines, he said.
Small Talk Daily’s Anthony Clark said CMH looked set for a stellar second half as well, benefiting from an uplift in demand, while Nissan and Ford were launching new models, which should entice customers back into higher value, and higher margin categories.
“The car rental side should do fantastically well, the used-car market remains very strong due to the dearth of new cars due to the global chips shortage,” he said.
“On a relative basis, with the platform it has in car rental, used cars and new cars, CMH is the best-placed automotive stock in the sector,” said Clark, adding there may even be a special dividend from the group at the end of its 2022 year.
CMH’s shares were up 3.85% at R27 in afternoon trade on Tuesday, having risen 80% so far in 2021, and by almost a quarter since the start of 2020.
Update: October 19 2021
This article has been updated with additional information throughout.
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