Durban-based Combined Motor Holdings (CMH) is shaping up as the sector's top company. Investors have been enjoying a quiet little earner.
With a market capitalisation of only R220m or so, it's off many radar screens. Those who buy in tend to retain their shares. Though CMH has enjoyed six successive years of growth, trade in the stock is limited. It has averaged a 27% return to shareholders over each of the past five years. In terms of net profit, it would rank ninth out of the transport and automobiles & parts sectors.
Now MD Jebb McIntosh is tired of his company being one of the best-kept secrets on the JSE. "We deserve a better market rating but we're too small," he says. He doesn't want an empire. It will be enough for now if CMH doubles its market cap in the next five years.
CMH's recent success owes much to astute management and tight controls. In 2002, despite a weaker new-car market in which group turnover dipped 2% to R2,59bn, operating profit rose 15%, pretax profit and headline earnings 21%, and dividend 15%.
McIntosh and financial director Stuart Jackson are confident CMH can continue its winning streak. What is less certain is the rate of growth. An overwhelming proportion of CMH turnover comes from motor retail, including vehicles sales, service and parts. Most of the rest comes from motor-related financial services and the National Alamo car rental division. Even allowing for a likely increase in vehicle sales if interest rates come down, Jackson says the group can expect "only so much growth" in its current form.
Last year's rand collapse put paid to an attempt to buy into a UK motor dealer group. There was already an obstacle in that the owners wanted to sell the whole operation, while CMH sought 33%. "They told us, all or nothing," says McIntosh. "Given the size of our balance sheet, we would have stripped ourselves to the limit."
But it was currency that finally killed the deal. When negotiations started, the exchange rate was R13,15/£. When they were called off, it was close to R19/£. The UK group has since been sold. McIntosh and Jackson are now eyeing other overseas deals. Talks about a possible Australian venture are at a preliminary stage.
CMH would also like to increase its market penetration in SA, where it has 51 dealerships and 3,5% of the new-car market. But dealerships rarely come to market. McIntosh is watching the rationalisation at another Durban-based motor group, McCarthy, in case anything becomes available there.
Mindful of the recent weakness of the new-car market, CMH has increased activity in used cars. Once, group sales of new cars were double those of old ones. Now, they are one to one. "Used cars have a better profit margin," says McIntosh.
He has high hopes for the National Alamo car rental business, for which CMH gained the franchise three years ago. It may be one of the smaller players in SA but the brand is big in the US, Europe and the UK, so it picks up a healthy slice of incoming tourist and business visitors. The long-term aim is to turn the brand into SA's third-biggest rental company behind Avis and Imperial.