Dealerships

Dealership in focus

The Dealerships division has operations in South Africa and the United Kingdom. The Dealerships SA business is made up of passenger and commercial vehicle franchises comprising over 25 of the major franchise brands sold in the country.

The Dealerships UK business represents five large OEMs, of which Ford is the largest.

Operating environment

Dealerships SA and Dealerships UK operate in the areas mentioned below.

Dealerships SA

Strategy

Dealerships SA’s strategy is to be a leading dealerships business representing various OEMs across South Africa.

Refer to website for more information
R'000 Change % Year ended
30 June 2018
Year ended
30 June 2017
Revenue 3.1 9 356 603 9 074 861
Operating profit 12.0 322 621 288 101
Operating profit margin   3.4% 3.2%
Profit before taxation 9.6 231 004 210 683
Net operating assets 9.6 1 096 354 1 000 715
RNOA   22.2% 35.7%
WACC   11.2%

Material risks

Mitigation of risks

  • New vehicle market: Vehicle price and interest rate increases are having a negative effect on new vehicle volumes. The decline in volumes will continue to have a negative impact on margins and gross profit generation, as well as the potential to earn factory incentives.
  • Portfolio of dealerships representing many vehicle brands
  • Resource-based local economies: The vehicle market in Rustenburg appears to have stabilised after the ongoing labour issues in the Platinum and Metal sectors, but the negative outlook on resources in general, as well as the possibility of labour issues re-occurring has made consumers in this area more cautious.
  • Monitoring the conditions in high risk areas
  • Global market conditions/Rand volatility: Conditions in the global markets causing severe Rand weakness and instability has resulted in increased vehicle pricing, which will negatively impact new vehicle sales. Price and interest rate increases over the past year have resulted in additional margin pressure, which is likely to continue.
  • Marketing of locally manufactured vehicles
  • Staff: Employment cost inflation and the availability of skilled personnel.
  • Improved recruitment process to ensure quality staff are employed, trained and developed.

Opportunities

  • Ownership of strategic properties
  • Significant advantages can be derived through strategic property ownership by reducing lease cost averaging and avoiding substantial rental escalations.
  • “Going Above and Beyond”
  • Dealerships’ culture has improved staff morale ensuring staff retention, ultimately resulting in improved customer service and retention.
  • Finance and insurance income
  • The division continues to improve the contribution received from back-end income and continuously seeks out further opportunities, enabling these levels to be maintained.
  • Parts and Service
  • A growing new vehicle car parc, offset slightly by extended service intervals, continues to create an opportunity for improved cost absorption and margin mix.
  • Multi-franchising
  • Selected OEMs are allowing multi-franchising in certain areas, and Dealerships SA has a number of these arrangements in place, and expect to realise the benefits in the coming year.
  • Online marketing and sales
  • Increased focus on the online marketing environments will provide increased sales opportunities to the division.

Activities

The Dealerships business consists of 51 (June 2017: 54) franchised motor dealerships – 43 (June 2017: 45) passenger vehicle, seven (June 2017: eight) commercial vehicles and one (June 2017: one) Super Group Wholesale dealerships – based in the Gauteng, North West Mpumalanga and Western Cape Provinces.

The division represents most major brands including Nissan, Renault, Ford, Mazda, Toyota, Lexus, Mercedes-Benz (including SMART), Honda, Land Rover, Jaguar, Volvo, Chrysler, Jeep, Dodge, Volkswagen, Audi, Isuzu, Opel, Suzuki, Alfa Romeo, Fiat (including Abarth), UD trucks, Hino trucks, FUSO trucks, Mercedes-Benz trucks and Isuzu trucks. Most new vehicle sales are passenger and light commercial vehicles, while medium, heavy and extra heavy commercial vehicles represent slightly more than 6% (June 2017: 6%) of new vehicle sales.

Results for 2018

Dealerships SA reported a strong set of results notwithstanding the subdued trading environment, significantly outperforming the NAAMSA statistics. The results include the nine Western Cape dealerships for the full year compared to only 10 months in the prior comparable year. As a result of Mercedes-Benz changing their business model from a franchise to an agency model, revenue and profitability of these dealerships reduced. National Mercedes-Benz sales volumes also declined by 17% in the second half of the financial year.

Dealerships SA sold one General Motors dealership and closed another, following the announcement that General Motors are exiting South Africa. Dealerships delivered a 13.4% growth rate in new vehicle sales (excluding dealerships sold/closed), outperforming the NAAMSA dealer market, which reported an increase of only 2.7% in new vehicle sales for the year ended 30 June 2018, by 10.7%. Used vehicle sales increased by 9.4% over the same period (excluding dealerships sold/closed). The Parts and Services business continued to perform well. Dealerships SA increased its operating margin to 3.4% from 3.2% reported in the prior comparable year.

Governance and sustainability

Refer to the Corporate Governance and Sustainability Reports on the Group’s website.

Outlook for 2019

The Dealerships SA business is anticipating difficult trading conditions to continue as consumers remain under pressure. We do foresee a downward trend in the market given slow economic growth and economic and structural uncertainly in South Africa. The change in the Mercedes-Benz model has not helped matters. However, we are well-placed in the market to take advantage of any recovery within the market.

Dealerships UK

Strategy

Dealerships UK’s strategy is to be the leading Ford dealership in the five counties around London and expand its dealership representation in the other dealerships it owns across London.

Refer to website for more information
R'000 Change % Year ended
30 June 2018
Year ended
30 June 2017
Revenue 45.1 9 925 263 6 840 438
EBITA 28.8 232 472 180 424
EBITA margin   2.3% 2.6%
Operating profit 29.7 227 282 175 243
Operating profit margin   2.3% 2.6%
Profit before taxation 13.6 132 862 116 965
Net operating assets 25.0 1 578 721 1 262 857
RNOA   12.9% 13.3%
WACC  

6.6%

Material risks

Mitigation of risks

  • New vehicle market: New commercial stock availability continues to be poor. This is particularly frustrating as demand remains strong. Although the business is taking advantage of improved margins, the poor stock availability may at some point affect contribution and overall profitability.
  • Monitoring market conditions and ensuring staying ahead of market trends.
  • Key management: The loss of any senior executives will potentially create management and leadership challenges in this highly competitive market.
  • Succession planning is ongoing and the management and reporting structures of the business are regularly reviewed and adapted to accommodate this where necessary.
  • Dilapidations: The onerous nature of UK leases regarding the dilapidation process and cost at the end of a lease is an area of concern and of potential unbudgeted cost to the business.
  • Consider budgeting for any potential costs that may arise, as well as undertaking intensive initial assessments of all properties.
  • Brexit: The long-term effect of Brexit on the UK economy when trade agreements are renegotiated.
  • Ford vehicles are imported from Europe into the UK and trade renegotiations and the timing thereof will be closely monitored.

Opportunities

  • New vehicle sales
  • Ford continues to be the market leader in the UK and Dealerships UK has a strong Ford presence with flagship dealerships in key locations.
  • Fleet and commercial
  • Demand continues to be high for commercial vehicles in the UK, and our dealerships are geographically well positioned to take advantage of this segment.
  • Used vehicle sales
  • Interest rates remain low and stable, with only small increases likely in the next 12 months; therefore the relatively buoyant used car market is expected to continue. The introduction of fixed interest rates has proved successful so far and potentially enhances the ability to sell added value products.
  • Service and parts
  • A growing ageing vehicle car parc with the customers keeping their vehicles for longer periods, means an increasing opportunity for servicing repairs and parts.
  • Ownership of strategic properties
  • Availability of properties in the UK is limited and thus, relocation at the end of a lease is often difficult and costly. Fortunately, the lease terms on the existing sites are long, while significant advantage can be derived through strategic property ownership. If the economy continues to grow and interest rates remain stable, it is likely that commercial property prices will increase and make it costly to acquire in the future.

Activities

Allen Ford is the second largest independently-owned Ford franchise network in the UK, operating in total 32 dealership outlets. There are 24 (June 2017: 18) franchised Ford motor dealerships, four (June 2017: four) franchised Kia dealerships, two Suzuki dealerships, as well as a Mazda and a Fiat dealership in five key franchise areas in England.

This includes Ford dealerships in Coventry, Rugby, Nuneaton and Warwick and a Kia dealership in Solihull. In Northampton County, Allen Ford has four Ford dealerships in Northampton Riverside (Fortune Close) and Bedford Road (with the latter being a commercial vehicle dealer), Daventry and Kettering. In Essex County, Allen Ford has eight Ford dealerships, two Kia dealerships and one Mazda and one Fiat dealerships.

One of the Ford dealerships, situated in Basildon, is regarded as the largest flagship for Ford in the UK, and is close to the Ford Dunton Technical Centre. In the fourth county, Swindon, Allen Ford has Ford dealerships in Swindon and Bath, as well as a Kia dealership in Bath. Allen Ford acquired Slough Motor Corporation effective 4 July 2017 for R414.3 million, which includes six Ford and two Suzuki dealerships in Kent and Berkshire.

As one of the UK’s leading Ford dealership groups, Allen Ford has substantial leverage, enabling it to stock large volumes of new and used passenger and light commercial vehicles (vans), which in turn gives the group a competitive advantage in the high volume new vehicle market. The Group is also a Motability Premier Partner, which is the leading car scheme in the UK for disabled people, enabling them to use their UK Government-funded mobility allowance to lease a new car. Moreover, it is one of the UK’s largest Privilege dealers, selling a high volume of cars at preferential prices to Ford, Jaguar, Land Rover and Aston Martin employees and their families.

Results for 2018

Dealerships UK’s results were positively impacted by the inclusion of Essex Auto Group and Slough Motor Corporation for the full year. The UK dealership market, during the reporting period, experienced a steep decline of 11% in new vehicle sales. Ford, with the introduction of the new Focus and Fiesta models in the second half of the financial year, made up for the lost market share in the UK, as a result of temporary and unprecedented supply problems with the old models.

Overall vehicle sales in Dealerships UK, contrary to the general new vehicle market trend and seeing the benefit of its strong Ford presence in key regions, grew by 9.2% in its existing dealerships, and including the acquired dealerships, up 43.8%. Dealerships UK reported used vehicle sales growth of 8.1% from its existing dealerships and including the acquired dealerships, growth of 51.6%.

Revenue and operating profit, in GBP-terms, increased 44.8% and 29.5%, respectively.

The UK properties were revalued during the year and this resulted in a net value increase of R36.4 million. In terms of IFRS, R54.8 million positively impacted equity and R18.4 million was impaired against profits.

Governance and sustainability

Refer to the Corporate Governance and Sustainability Reports on the Group’s website.

Outlook for 2019

The UK dealership market is expected to stabilise despite the uncertainty pertaining to the effect of Brexit and the speculation regarding the change in government policies on shifting diesel technology used towards the latest cleaner Euro 6 diesel standard. The strong Ford and Kia presence of Dealerships UK in key counties will deliver once the above uncertainties have been resolved.