Johannesburg - JSE industrial counters with exposure to the vehicle sector's profit margins will normalise in 2010 as demand for vehicles in South Africa recovers, said analysts.
Barloworld, Bidvest and Imperial all have car retail and rental divisions. These have been hit by a massive slowdown in the local automotive market, which began in mid-2006.
"From an overall perspective all three companies have rationalised their cost base," said John Thompson of Investec Asset Management. "Any increase in demand will go straight to the bottom line."
South Africa's demand for cars has stabilised at extremely low levels. According to the National Association of Automotive Manufacturers of South Africa (Naamsa), 30 019 new vehicles were sold in November. This is a 12.1% drop from the sales volumes in the same month one year ago, and the smallest drop recorded in 19 months.
Naamsa said that the industry "was slowly emerging from the extremely severe recession".
Chris de Kock, head of sales and marketing at Wesbank - one of South Africa's biggest car loan providers - recently said confidence among automotive dealers has improved in the final quarter of the year, but "a slow and painful recovery" awaits in 2010.
The biggest obstacles in the market are the still-high indebtedness of South African consumers and retail banks' reluctance to extend credit.
Afena Capital's Khaya Gobodo said the South African car market has a realistic sales volume capacity of about 400 000 to 500 000 units/year. The market hit 681 235 units/year at its high point in 2006 and motor retailers expanded capacity accordingly.
Gobodo said the Barloworld, Bidvest and Imperial trio has done a "decent job" in downsizing to realistic levels.
"All you need is a small increase in volumes to start seeing some tangible improvements," he said.
Imperial operates various car dealerships across the country as well as Associated Motor Holdings (AMH).
Thompson said the company makes an attractive investment case thanks to AMH, which has a competitive pricing advantage over the traditional South African car makers.
Barloworld's most recent results for the year to end-September already showed the benefits of the company's restructured and scaled-down automotive division.
Second-hand still tops
Revenue was steady from the previous year and operating profit increased 30% to R703m in the year to end-September 2009. The unit makes up 40% of group revenue in the most recent financial year, and 35% of operating profit in the same period.
"They have benefited from cost-cutting and the increased profitability of second-hand cars," said Gobodo.
Barloworld operates various new and used car dealerships around the country.
The South African market has seen relatively robust demand for used cars, which have gained popularity among debt-shy consumers by virtue of their perceived good value for money. Wesbank has estimated that the used car market is currently 87.6% more active than the new car demand.
Industry commentators say that the used car market could be inhibited by a shortage of quality used models due to less repossessions, and the fact that consumers are choosing to hang onto their cars for longer periods.
Gobodo said this limit on used car stock has allowed Barloworld some leeway in used car pricing.
Bidvest has also benefited from its exposure to the used car market through the Burchmore's brand. The automotive division contributed 9.8% to group trading profit and 14.3% to total revenue in the financial year to end-June 2009.
The group's vehicle retailing division is McCarthy, which is still operating under pressure.
Barloworld, Imperial and Bidvest all operate car rental companies and have signalled that these are likely to benefit from the expected upsurge in tourists for the 2010 Fifa World Cup.
Thompson said that all three brands - Budget Car Hire, Europcar and Avis - are well-known globally and will cash in.
- Fin24.com