The SA motor industry: Blowing a gasket in 2020 - Prudential
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A N A LY S I S
The SA motor industry:
iStock-1140988145
Blowing a gasket in 2020
Pindiwe Mbelani
EQUITY ANALYST
i KEY TAKE-AWAYS
South Africa’s motor vehicle industry their share prices fell significantly during
had already been shrinking ahead of the worst of the crisis.
the onset of the Coronavirus, and the
Prudential added to its position in Motus,
economic lockdowns it prompted in
and bought shares in CMH, when the
2020 had a devastating impact on motor
companies’ price-to-book valuations
vehicle sales, rentals and manufacturing,
were extremely attractive, due to their
causing even more severe downsizing.
improved profitability following cost-
The four main listed motor vehicle cutting, much stronger cash generation
Prudential Investment Managers ©
companies were hard-hit in terms of and prudent cash management. The share
profits, job losses, salary cuts, fleet and prices have subsequently rebounded,
dealership downsizing and more, and adding vaue to client portfolios.
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T he advent of the Coronavirus
pandemic in South Africa was
the equivalent of a blown gasket
multiplier effect created by the sector.
It is the country’s largest manufacturing
industry. However, these numbers have
for the local motor vehicle industry, been shrinking in recent years, as Graph
rendering it incapable of powering 1 highlights, due to the slowdown in
ahead without some serious repairs the economy and associated pressure
in an already-weakened environment. on consumer spending: new vehicle
The economic lockdowns of 2020 sales amounted to only 536,000 in
caused motor vehicle sales to grind to 2019, a 25% decline from their peak of
a halt for a time, prompting further nearly 714,000 in 2006. Consequently,
downsizing across the major companies, even before the pandemic, the sector
and it was only these “repairs”, plus had been downsizing in the form
a better-than-expected performance of closing loss-making dealerships;
from the pre-owned vehicle business moving away from dealership brand
segment in the last two quarters of exclusivity to the consolidation of
the year, that supported industry several brands under one dealership;
results. Although both new and used reducing real estate space and staff
car sales were lower for the year, the complements; and cutting rental
cost-cutting and resulting improved fleet sizes to help companies remain
profitability left the companies better profitable in a shrinking market.
equipped to accelerate out of the
crisis, albeit still having to navigate Not only have consumers been cutting
tough conditions. back their new car purchases in absolute
terms, but they have also been trading
An important, but shrinking, sector down from premium, more expensive
The local automotive industry, brands like Mercedes and BMW to the
comprising vehicle manufacturing, more affordable brands like Toyota,
exports and retail sales, contributes VW, Hyundai, Renault, Nissan, Mazda,
some 6.4% to South Africa’s GDP, Kia, as well as relative newcomers
while accounting for a total of around Suzuki and Haval. Affordable brands
457,000 jobs across manufacturing, have gained good traction in the
assembly, retail sales and other local market, having managed to
Prudential Investment Managers ©
associated roles, thanks to the strong improve their quality significantly
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A N A LY S I S T H E S A M O T O R I N D U S T RY
Graph 1: SA’s new car sales declining even before the pandemic
Graph 1: SA’s new car sales declining even before the pandemic
800 000
700 000
600 000
500 000
400 000
300 000
200 000
100 000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Forecast 2021
Forecast 2022
Source: NAAMSA
SOURCE: NAAMSA
over the years, taking market share an incredible 98% drop from 2019
and heightening competition even levels and May down some 68% after
further. the reopening. And sales have only
recovered partially since then: every
Coronavirus takes new sales levels subsequent month’s volumes have
back 20 years, devastates rentals been below their 2019 equivalent.
Into this depressed environment came For 2020 as a whole, local new vehicle
the Coronavirus, with its accompanying sales totalled only 380,000, 29% lower
market lockdown, in March 2020. than 2019 and at a level last seen some
Vehicle sales and manufacturing were 20 years ago, as illustrated in Graph
completely shut down from 27 March 1. Buyers have not been sufficiently
to 13 May, when most of the damage tempted despite 50-year low interest
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was done, with April sales registering rates. Vehicle exports from South
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Africa also fell by nearly 30% for the latter months of 2020, used cars saw
year as a result of a plunge in offshore strong purchases due to pent-up
demand, hitting jobs and industry consumer demand, as well as new
revenues alike. demand from consumers preferring
to switch away from unsafe public
Exacerbating the conditions has been transport, a trend that was mirrored
the virtual standstill in business travel in many other countries. Also in favour
and international tourism for most of the used car market was the rand’s
of 2020, which has had a devastating sharp depreciation, which made new
impact on the car rental businesses of cars more expensive, as well as the
the country’s four major listed vehicle decrease in supply from the new
retailers: Motus, Bidvest, Barloworld vehicle market due to the disruptions
and Combined Motor Holdings (CMH). in manufacturing. All these factors
Approximately 13% of new cars sold helped create a floor under pre-owned
in the country are sold on to the market prices.
rental businesses every year. Leasing
operations including those of Europcar At the same time, the surge in demand
and Tempest (both owned by Motus), for used cars also supported the
Bidvest Car Rental (Bidvest), Avis rental market to some extent. This is
(Barloworld) and First Car Rental because when the rental companies
(CMH) were dealt a severe blow, and are regularly “de-fleeting”, or reducing
rental demand remains subdued to their inventory of used rental cars at the
the present day. end of the tourist season, they sell into
the used car market. Last year, many
Used vehicle market thrives in the industry were concerned that
One of the only lights in the industry dumping new supply after the severe
in the last year has come from the lockdown conditions where dealerships
pre-owned vehicle market, where were not allowed to operate (just
demand has risen in recent years due after peak tourist season when the
to the trend of consumers moving most de-fleeting occurs – April to
away from buying new cars. This was June) would overwhelm demand and
only accelerated by the pandemic. cause the used car market to collapse.
Prudential Investment Managers ©
When sales restrictions eased in the However, this didn’t happen. Instead,
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the rental companies sold their stocks aggregate 300bps (3%) interest rate
slowly into the market and were also cuts during the year, lower debt levels
met with resilient demand in the and having fewer vehicles to finance.
third and fourth quarters of the year. For example, given that Motus has
Surprisingly, groups like We Buy Cars debt of R7.6 billion on average, the
reported their best August sales ever, 300bp reduction in the interest rate
and Barloworld’s used car division saves them around R200 million per
similarly experienced an excellent year in interest costs, which is highly
August and September. This strong earnings-accretive.
demand contributed to maintaining
a price floor under the pre-owned Not firing on all cylinders
market. Despite these positive developments,
none of this rationalisation has proved
The automotive retailers managed successful in returning the vehicle
to improve their profit margins after rental businesses to profitability.
having taken tough downsizing The general consensus is that it takes
measures. Because they had larger- a 65%-70% utilisation rate for a
than-usual de-fleeting that was company to be profitable, and Motus
necessitated by lower rental activity most recently reported a utilisation
levels, they had more cash on hand, rate of 59%. The latest financial results
using it in turn to pay down their across the motor industry confirm that
debt more quickly and improving even though companies are getting
their balance sheets. Plus, having closer to profitability in their shrunken
aggressively cut the size of their rental formats, much higher total demand
fleets there was less depreciation is needed for the rental segment
to write off, lower overhead costs to be profitable. This requires the
due to fewer branches and staff return of international tourism and
(Motus had retrenched 45% of its resumption of business travel, and
rental staff, for example) and, also without these key factors, the rental
key, improving the utilisation rates market is incapable of firing on all
from very low levels for their (fewer) cylinders.
existing vehicles. Financing costs for
Prudential Investment Managers ©
the industry also fell due to the SARB’s If we look at the impact the pandemic
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has had on the individual listed we had already been experiencing.
companies in the sector, we see that all Still, demand is improving, helped
four companies’ share prices de-rated by exceptionally low interest rates,
considerably in the first few months of subdued core inflation and dealer
the lockdown, with the 68% drop by incentives, among other measures.
Motus the largest, and the 29% decline These factors, combined with good
by Barloworld the smallest. Both CMH demand in the used vehicle market
and Super Group lost around 50% and the prospect for the local rental
of their value. Subsequently all have market to improve as tourism and
experienced a gradual re-rating, largely business travel gain ground (propelled
due to their higher-than-expected cash by spreading vaccinations), gives us
generation and improved profitability. reason for optimism that the sector
All the companies acted prudently, is over the worst. While it will not
conserving and generating more cash, be a smooth road ahead, at least the
paying down debts and cutting costs companies are now appropriately sized
severely. and geared to meet the exigencies of
the post-Coronavirus world.
Geared to meet the post-
Following we offer snapshots of Motus
Coronavirus world
and CMH, and explain why we are
Looking ahead to 2021 and beyond,
holding these companies’ shares in
the National Association of Automobile
select client portfolios, including the
Manufacturers SA (NAAMSA) expects
Prudential Dividend Maximiser Fund.
local new vehicle sales to recover
only gradually due to depressed Motus: Market leader with strong
consumer and business sentiment. cash flows
As Graph 1 shows, it is forecasting Motus is a good example of the
a 15% increase in new vehicle sales experience of the entire sector during
volumes to around 440,000 for this year, the pandemic. It suffered the sector’s
gradually building up to potentially largest share price decline, primarily
reach 2019’s volumes only from 2023 because it has the largest market share
or so. This is slower than most other (at 20.2% as of June 2020) and is very
Prudential Investment Managers ©
countries’ projected recoveries due dependent on the local vehicle market.
to the recessionary environment It unbundled from the Imperial group
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Graph
Graph2: Prudential
2: Prudentialadds
addsMotus asP/B
Motus as P/B
fallsfalls below
below exceptionally cheap
exceptionally cheap 0.6X
0.6X
1,80
1.60
20,00%
1,40
1,20
15,00%
1.00
0.80
10,00%
0.60
0.40 5,00%
0,20
0 -0,00%
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jun-22
ROE Price to Book (RHS) Median P/B (RHS)
Source: Bloomberg; Uses floating-rate bank certificates of deposit spreads as a proxy for credit market pricing trends
SOURCE: Company data, Bloomberg
in November 2018, and is squarely free cash flow and balance sheet: it
focused on the industry, with a fully had maintained a net debt/equity ratio
integrated business model across (gearing) within its longer-term target
imports and distribution, retail, rental, range of 50%-75% for several years.
financial services, and aftermarket During the April-June 2020 period, at
parts and services. It is focused on the height of the lockdown and end
entry-level and affordable vehicles of its financial year, Motus reported a
rather than the premium segment, and 70% decline in revenue from its rental
has exclusive sales agreements with operations (Tempest and Europcar
Hyundai, Kia, Renault and Mitsubishi, brands in South Africa), a 40% drop
as well as selling popular brands like in its retail sales operations and a
Toyota and VW. 50% revenue fall from imports and
distribution. Although the company’s
Prior to the pandemic, Motus was vehicle retail and rental business
Prudential Investment Managers ©
highly cash generative, with a strong accounted for some 70% of its revenue
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in the 12 months to June 2020, this by 35% or some 7,000 vehicles, but
segment contributed only 14% of its it also closed 19 outlets countrywide
total profit – the operating margin was and reduced its rental workforce by
only 0.6% for the period. By contrast, 45%. Every source of spending was
its financial services business stood it impacted, with both voluntary and
in good stead, despite its small (3%) compulsory retrenchments, salary cuts
contribution to group revenue, thanks for everyone earning over R250,000
to its annuity revenue streams: it annually, salary freezes for FY2021, the
comprised nearly 40% of its operating postponement of all capital spending
profit with only a 10% decline in and property rental deferrals, among
revenue. In total, Motus reported a other measures.
7.8% decline in total revenue and
41% drop in total profit for its 2020 Motus also opted to conserve its cash,
financial year. suspending its dividend payments for
both December 2019 and June 2020,
The group also has retail sales and but resuming them for December 2020
rental businesses in Australia and the with a 30% payout level versus its
UK that provide some diverse income traditional 45%. This was possible due
streams. The Australian vehicle market to its strong cash generation during the
didn’t experience as large a downturn year, which also allowed it to conduct
as South Africa, and has recovered share buybacks at attractive share
much more quickly, and although the prices. The group made it through the
UK vehicle market was hit hard by worst of the downturn with its existing
lockdowns, it is also bouncing back debt covenants intact, plus some R5.8
more quickly than the local market. billion in unused debt facilities, while
its gearing stood at 60% at the end of
A large part of Motus’ focus during June 2020, only slightly higher than
the pandemic was on cutting its costs, the 56% a year earlier.
starting in an environment where
it had already downscaled due to At Prudential we owned shares in
South Africa’s extended economic Motus before the pandemic, buying
malaise. Not only did it accelerate when it traded below its longer-term
Prudential Investment Managers ©
its de-fleeting, cutting its rental fleet valuation, based on the company’s
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strong free cash flow and balance price plunged due to the Coronavirus
sheet, plus its leading market position lockdown in March-April 2020, at one
and large offering of used vehicles point down some 68% to a low of
and small SUVs. Its retail business is around R23.80. Since then, its price/
also squarely focused on the growing book value ratio (P/B) has re-rated,
entry-level and affordable vehicle rising to 1.3X and closer to its historical
segments, and the management team P/B of 1.5X. The return on equity (ROE)
has proved its ability to be flexible is also expected to improve to pre-
and scale its operations to match crisis levels. Its share price managed
the changing conditions of South to nearly double by the end of 2020,
Africa’s automotive market. Going and as of the end of March 2021 had
forward it has a selective acquisition gained some 287% from its April
strategy to further diversify (already lows, trading at R89.40 compared to
with a small presence in Southeast its pre-Coronavirus price of R73.00.
Asia and Southern and Eastern Africa) This is an excellent example of how
and implement more operational Prudential’s clients have benefited as
efficiencies and innovations. a result of our active, valuation-based
investment process.
We bought more exposure to Motus
in our client portfolios when its P/B
was extremely low, after its share
CMH: Offering excellent value
during the crisis
By Kaitlin Byrne, Portfolio Manager
The conditions faced by CMH, and the 80% of its profits). For its latest interim
actions it took to navigate the crisis, results to 31 August 2020, the group
were very similar to those of Motus, reported a 38% fall in revenue, while
with its primary focus equally being operating profits were down 76%,
on retail and rental vehicle operations and its operating profit margin was
Prudential Investment Managers ©
in South Africa (accounting for over squeezed further from the 3.5% it
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GraphGraph
3: Prudential buysbuys
3: Prudential CMH as P/B
CMH falls
as P/B below
falls attractive
below attractive1.0X
1.0X P/B
P/B
7,00 45,00
40,00
6,00
35,00
5,00
30,00
4,00 25,00
3,00 20,00
15,00
2,00
10,00
1,00
5,00
- -
1999
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2015
2016
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2018
2019
2020
2021
2022
Return on equity (%) (RH) Price to book Median PB +1 Std Dev -1 Std Dev
SOURCE: Refinitiv
Source: Refinitiv
recorded in 2019. This resulted in a Thanks to de-fleeting, its finance costs
loss for the six months of R14.3 million were lower and cash resources rose
compared to a R90.5 million profit a 13% for the period, and the group
year earlier. was able to declare a dividend for
the six months to August 2020 (based
CMH also underwent extreme cost on its earnings for the year to end
cutting and down-sizing as it reported Feb 2020), after skipping its annual
total staff numbers were cut by 24% dividend payout for the 12 months
over the six months and it instituted to end February 2020 to conserve its
a salary sacrifice programme. It was cash resources.
also able to negotiate concessions
from its landlords like rental holidays Being the smallest company in the
and payment deferrals, while merging motor vehicles sector, CMH has
Prudential Investment Managers ©
franchises to reduce its rental costs. low structural costs relative to its
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competitors and also primarily offers return on equity – even with lower
affordable brands like Haval and rental sales and car sales – as a result
Suzuki, catering to the more buoyant of its substantial reduction in costs
end of the local market. Because of its and interest rate savings.
ability to bring in the right brands at
the right prices, It has been increasing Consequently, when the company
its market share in recent years, but traded at a P/B of 1.0X in March 2020,
with a market capitalisation of only far below its longer-term fair value
around R2.0 billion it is still relatively of closer to 2.5X P/B, it presented us
small compared to Motus’s market with a unique opportunity to buy CMH
cap of R17.9 billion. shares. At the same time, it was trading
at a very high long-term dividend yield
From its Coronavirus low of around of 18%. Since we believed the cash-
R9.00 in May 2020, the CMH share generating ability of the business had
price reached R15.00 by the end of the not deteriorated permanently and we
year and had nearly doubled to R18.00 regarded it as an excellent dividend
by the end of March 2021. Still, this generator, we decided to add it to
was just off the R18.40 level at which the Prudential Dividend Maximiser
it was trading prior to the advent of Fund. Subsequently, the CMH share
the pandemic, so the share has not has recovered, adding good value to
performed as well as Motus during our clients’ returns, but it is still very
the recovery. CMH should return to cheap at a P/B of 1.6X and a long-term
a position where it can earn a 24% dividend yield of 10%.
Prudential Investment Managers ©
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Pindiwe is an Equity Analyst at Prudential Investment Managers. She joined Prudential in April
2018 and is responsible for analysing stocks within the industrial and financial sectors. She holds
an M.Com in Financial Management from the University of Pretoria and is a qualified Associate
Chartered Management Accountant, as well as a CFA Level 3 Candidate.
Kaitlin joined Prudential in May 2015 as an Equity Analyst, and has six years of financial industry
experience. She is currently the joint Portfolio Manager on the Dividend Maximiser Fund, Select
Institutional Funds and the African Equity Funds. Kaitlin is also responsible for research on South
African stocks in the Consumer Staples, Industrial and Gaming and Leisure sector, as well as
African stocks in the Banking and Telecoms sector. Prior to joining Prudential, Kaitlin completed
her articles at Ernst & Young, where she was responsible for auditing companies in the Finance,
Gaming and Leisure, Real Estate and Manufacturing sectors. She holds a B.Acc (Stellenbosch), is a
Chartered Accountant (CA (SA)), and a Chartered Financial Analyst (CFA Institute).
Prudential Investment Managers ©
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