Keep your eye on this JSE retailer in 2016

by , 03 December 2015

This year we've seen the South African economy struggle in almost every aspect. There has been rise in inflation, which stands at 4.7%. Interest rates increased twice this year and now stands at 6.25%. But one company is weathering the storm and proving it can grow profits, even in this tough environment.

This year we've seen the South African economy struggle in almost every aspect. There has been rise in inflation, which stands at 4.7%. Interest rates increased twice this year and now stands at 6.25%.
 
The rand's performance has been terrible and there are no sign that it's slowing down. The rand currently stands at an all-time low of R14.39 to the dollar. 
 
In March, we saw a hike in tax rates by 1%. Unemployment rose from 25% to 25.5%. 
 
This has all impacted on South Africa's economic growth. Last month, we barely avoided a recession and our actual economic growth rate stands at a meagre 1%. 
 
I can keep going, but my main focus today is the latest results of new car sales. 
 
Last month, new car sales grew 0.4% compared to last year. This is the first rise in nine months. But it's nothing to get excited about. 
 
Normally when car sales slow and show no growth, you'd expect it to have a dire impact on companies that operate in that sector. 
 
But one company is weathering the storm and proving it can grow profits, even in this tough environment.

Slow growth in new car sales isn’t slowing this company down

Investors who are interested in motor retailers, there’s really only one listed JSE company that owns this market.
The company I’m talking about is Combined Motor Holdings (JSE: CMH).

You’d expect the lack of growth in new vehicles sales to impact CMH’s operations. But this company has a trick up its sleeve.

You see, CMH doesn’t only focus on new car sales. It’s managed to diversify in the used cars sector, vehicle parts and financial services. And diversifying its operations helped CMH to profit through the difficult times.

With consumer confidence decreasing, you’d expect South Africans to move away from buying new cars. On top of that new cars are becoming more and more expensive.

But this is actually beneficial for CMH.  

Two catalysts behind Combined Motor Holdings' growth

Despite the lack of consumer confidence and a strain in household’s disposable income, CMH has still been able to remain profitable.

How?

CMH’s diversification strategy has helped two of its divisions maintain a strong foothold in the vehicle industry

#1: Used-car division is one of CMH strongest performers

CMH’s used-vehicle sales rose by 8,7%, which is more than the 5,5% growth of new vehicle sales. And any effect of an increase in new vehicle prices will create a good opportunity for CMH to thrive in the used vehicle sector.

Even the CEO of CMH Jebb McIntosh believes this will benefit the group. “This will create an opportunity in the used-car market, “an area where the group has traditionally been strong”.

 #2: Car hire: CMH’s saving grace

The demand for car hire will always remain attractive. You see, when people travel, mainly by air, they usually need to hire a car when they get to their destination. This provides a great opportunity for car retailers to build extra profit margins.

And CMH showed it can use this demand for car hire to its benefit.

CMH’s car hire division showed continued excellent growth, with a 9% increase in profit. This division continued its focus on increasing the level of corporate and tourism sales which return a higher margin.

And the proof is the pudding. CMH’s gross profit margin improved from 13.3% to 14.7%.

But that’s not all.

CMH recently launched its van and truck rental division, which has branches in Gauteng, Durban and Cape Town.

Another key factor that makes CMH an attractive company

Usually when I evaluate a company, I look at if it has a strong cash flow. A strong cash flow means that a company can use the cash it’s earned to enhance shareholder value.

And that’s what CMH did by paying great dividends.

CMH declared a dividend of 46,5c per share, which represents an increase of 43%. It also has an attractive dividend yield of 6.97%.

Another aspect that might attract investors is CMH PE ratio of 7.63, which mean it’s trading at cheap price.

So with CMH strategy focussing more on the used car and car hire sectors, this might give the group a leading edge in 2016. It’s definitely a company to keep your eye out on. 


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