Motus is a company that was unbundled from Imperial Holdings and operates in the automotive industry. To give my valuation a bit of context, here some background on them:
They have four main business segments, namely:
- Import and distribution –
They’re an exclusive importer/distributor of Hyundai, Kia, Renault and Mitsubishi. This also means that you’re at the whim of the car manufacturers. You have zero control if they make a car that customers like or not. In addition to that, despite having long standing agreements with these manufacturers, the potential of losing the right to import/distribute their cars could have a huge impact. As an example, Honda just closed their facility in Swindon which has been operation since 1989. Regardless of whether it was due to Brexit or a struggling car industry, these things do happen.
- Retail and rental –
This segment is the largest contributor to revenue. Motus has 356 dealerships in SA, 112 dealerships in the UK and 30 dealerships in Australia. This all sounds very grand, but also means high fixed costs. One also doesn’t even have to even mention the threat to the retail and rental industry from the likes of Uber, We Buy Cars and Mobility as a Service.
- Financial services –
Motus is manager and administrator of service, maintenance and warranty plans to 730 000 clients. Whilst this is fantastic annuity income, the entire division makes up less than 5% of total revenue. It is also highly dependent on the performance of the retail and rental division.
- Aftermarket parts –
Motus is the distributor, wholesaler and retailer for parts for out of warranty vehicles. Whilst I do like this business (especially for parts for Renault), it also makes up a significantly small portion of total revenue.
From the above, you can start to see that Motus basically operates the full value chain. However, I still have some qualms about the entity.
South Africa has a considerably immature parc. But with recent economic conditions and unemployment rates in South Africa, I don’t see the motorisation rate changing any time soon. South Africa’s average car parc for passenger and commercial vehicles is roughly 9.5 years, which is fairly old for any vehicle. This is great for short term results, but in the long term waiting on each replacement cycle to put out decent results is hardly a growth strategy.
Motus faces a significant forex risk associated with importing vehicles and parts. Hedging forex risk is complex and expensive, especially when your reporting currency is as volatile as the rand.
I’m rather adverse to entities that take on large amounts of debt. Yes, debt is cheap financing and arguably necessary to achieve decent growth but taking on too much poses massive financial risk. The pre-listing statement mentions a targeted net debt to equity ratio of 55% to 75%. This is quite a vast range and, in my mind, a net debt to equity ratio of 75% is high for any company.
I could go on about the multitude of risks they’re exposed to. Highly competitive market, rental market is heavily dependent on tourism, disruption risk of alternate business models (like we buy cars, Uber, Mobility as a Service as mentioned previously), development of public transport infrastructure (perhaps a bit farfetched in South Africa) a global movement to more eco-friendly transport (perhaps more applicable to UK market), increase fuel costs make owning a car less affordable, etc, etc.
Based on the above, I’ve already got a negative feeling towards Motus and thus performed a bit of a napkin DCF just to get a feel of whether or not I think the share is over/under valued. Instead of valuing each segment separately, I’ve taken a simplistic approach and assumed that they’re all subject to similar risk (i.e.: if consumers don’t like the new Renault Sandero, Motus won’t sell as many, people won’t want to hire them, there will be less consumers to finance, and thus less aftermarket parts to provide as less cars will be around that need them). I ended up at a figure of R85 a share, which approximates the value of R80.5 it’s currently trading at.
I feel like I may have gone on a bit of tangent, but to conclude, would I buy it? No. This doesn’t mean that it’s not a good stock to invest in; it’s just not my cup of tea.
Let me know what you think!
What The Finance 