Combined Motor Holdings (CMH) suffered an 8.3% year-on-year decrease in headline earnings per share to 305.2c for the financial year ended February 28, owing to the headwinds facing the domestic economy.

Widespread corruption, combined with mismanagement of State-owned enterprises, uncertainty regarding land expropriation and political leadership focused on short-term goals ahead of the national election, reduced business confidence to near all-time lows, leading to economic decline, CMH CEO JD McIntosh said in a media release.

Revenue, however, grew by 5.5%, owing to a slight increase in vehicle sales volumes, a healthy mix of higher-priced luxury models and a modest 2% to 3% increase in the average price of new vehicles.

Further, despite the decrease in headline earnings, continued strong cash flow generation made it possible for the directors to recommend that the dividend scheduled for payment in June be kept at last year’s level of 115c per share.

McIntosh highlighted noteworthy movements in respect of the car hire fleet and its attendant borrowings.

The net book value of the fleet increased by R52.8-million, while the related borrowings level increased by R237.9-million.

In previous years, the group used a portion of its surplus cash to settle interest-bearing borrowings early. While this policy continued during the year under review, at year-end, new fleet vehicles acquired were financed using external finance facilities, and the intragroup funds were returned and held in a call account.

At year-end, the group held cash resources of R676-million, compared with the previous year’s R373-million.

The hire fleet segment represents the bulk of the group’s business.

During the year under review, new passenger and light commercial vehicle sales volumes decreased by 1.8% nationally.

This followed a 0.4% increase in the prior financial year, and declines in each of the preceding three years.

McIntosh noted that the macro picture for the industry was one of increasing costs, principally salaries and property costs, offsetting a stagnant revenue line.

Compared with the national sales volume decline, the group achieved a modest 1.9% improvement. The opportunity for higher-volume growth was hampered by supply disruptions at Ford, which represented the highest-volume contributor to group sales.

The national luxury model segment continued its downward trend in sales volumes. The group is only exposed in respect of its Volvo/Land Rover/Jaguar dealerships and these, collectively, bucked the trend and recorded volume growth.

The segment’s overall decline in profitability was attributable mainly to the difficult conditions in the used-car departments.

While national sales levels are estimated to have fallen by about 10%, group sales volumes were flat.

This segment suffered a reversal of its ten-year record of rising earnings.

The 24% decline was attributable to the reduced prices at which the retired fleet could be sold.

Nevertheless, the fleet size, use rate and average daily income rate remained stable.

The increase in the price of replacement fleet vehicles was offset, in part, by a reduction in the number of luxury vehicles and their replacement by models in the medium price range.

The sector remains extremely competitive and the drive to reduce operating costs continues.

Financial Services

This segment comprises insurance cells where products are sold in tandem with vehicles, and joint ventures focused on the financing and collection of credit facilities granted to buyers.

Both areas recorded increased profitability, despite tough market conditions and adverse consumer credit statistics.

Particularly highlighted was the 11% growth in premium income, an indication of improved penetration in a flat market. This annuity-type income is expected to drive steady growth in the years ahead.

Prospects

McIntosh is not optimistic about the short-term future of domestic vehicle sales.

Predictions for national vehicle sales for the current calendar year vary from a 1% contraction to 2% growth, which will be the lowest level in almost a decade.

On a more positive note, however, McIntosh noted that interest rates appeared to have stabilised, and that, in real terms, new-vehicle affordability continued to improve.

The National Association of Automobile Manufacturers of South Africa recently reported that the rate of new-vehicle price increases had been well below the consumer price index for the past 15 months.

Owing to the competitive pressures facing vehicle manufacturers, attractive sales incentives are likely to continue.