In 2022 South Africa’s automotive industry saw a 14% improvement in new car sales.
At the same time – sales were still around 50% lower than the 2013 highs…
But this recovery trend has suddenly stalled.
Interest rates are taking their toll, and consumers are in distress.
So – are car sales on the upward or downward trend? And what do they spell
for the two car retailers on the JSE?
A warning about car repossessions in SA has sounded
The Ombudsman for Banking Services (OBS) has warned that the repossession of vehicles by banks is on the rise. People are falling behind on vehicle finance repayments for increasingly longer times, and banks are being forced to repossess vehicles to recoup their capital.
According to a BusinessTech report, Nedbank’s latest NedFinHealth Monitor shows that 76% of South Africans say their expenses increased in the past 12 months, while 62% say their spending equals or exceeds their income.
Additionally, 69% of South Africans cannot pay all their bills on time.
Car sales have now also started to lag behind
While new car sales at the start of 2023 looked like a recovery was still ongoing – things have turned around in the past couple of months.
July 2023 compares favourably with July 2022, with 43,575 new car sales compared to 43,264.
But August and September 2023 show big declines compared to 2022… In 2023 these two months sold 45,727 and 46,021 cars, compared to 47,346 and 47,984 in 2022. That’s a total of 3,582 less cars sold in these two months.
At the average value of car financed by Wesbank (R377,252) that equates to more than R1.3 billion in lower sales over the two-month period…
To put that into perspective that’s equal to the value of around 10% of CMH’s, a JSE listed car retailer, annual revenue lost in two months!
Annualised that sized drop would be more than half of all of CMH’s sales…
The JSE’s two car retailers compared
There are two companies on the JSE that make it their main business to sell new, or used cars…
That’s Motus and CMH Group.
CMH brings in around 91% of its revenue from car retail – with the balance being from car hire and financial services. Motus on the other hand gets around 68% of revenue from retail and rentals, while it also makes money from imports and distribution, aftermarket parts and mobility solutions.
As you can see, CMH is a lot smaller than Motus, which commands more than 20% of the market share in South Africa.
Both companies are on PE ratios below 5 – which is half of the JSE average…
Motus has lower debt, whilst CMH has a MUCH higher dividend and better return on equity.
Considering the fact that interest rates are high right now, I’d much rather put my money with the company that has lower debt.
But, when investing in these companies today, you need to acknowledge the fact that retail car sales in the next year will be lower – or stagnant at the very least.
That means lower profits are likely – and that’s why the markets are valuing these stocks at such low PE ratios…
If we see a drop in interest rates, which is likely by mid-2024 perhaps… I’d definitely give Motus a second look.
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