Chief Financial Officer's review

"The Group has proven resilient in another year of challenging operating conditions. In most cases, our business segments are nearing pre-pandemic trading levels. The synergies across our integrated business model, and the agility and urgency that has become standard operating procedure at Motus, will support our continued renewal and growth."

Ockert Janse van Rensburg

Chief Financial Officer


“The strong free cash flow was primarily generated by solid operating profits, decreased finance costs, and reduced working capital.”

Performance review

The Group's results for the year reflect strong strategic and operational achievements, which supported a resilient financial performance in a challenging and evolving trading environment. The impact of COVID-19 on the global automotive industry continued to disrupt the manufacture and supply of vehicles from OEMs, limiting inventory availability.

The Group's successful implementation of our COVID-19 action plan and related initiatives enabled us to convert excess vehicle inventory and vehicle rental fleet into cash. We also continued to align our cost structures and adapt our diversified operations to the changing environment and used available government relief programmes where they were available, mainly in our foreign operations. This shift in focus to resilience, agility, and recovery has supported necessary adjustments to our business model, driven by an agile and entrepreneurial management team, that provides a solid springboard for growth.

Financial overview

Revenue increased by 19% mainly due to improved performance in the Import and Distribution segment, the retail businesses (in South Africa, the UK, and Australia), and the Aftermarket Parts business segments. The increase was offset by decreased revenue contributions from the Car Rental and Financial Services business operations. The increase in revenue was supported by an increase in the sale of new and pre-owned vehicles, volume increases in the Aftermarket Parts business and price inflation.

The revenue increase was as a result of a 22% and 25% increased contribution from new and pre-owned vehicle sales respectively, and an 18% increased contribution from parts sales. Our contribution from rendering of services decreased by 3%, mainly due to reduced car rental revenue.

Operating profit increased by R1 659 million (78%) with all business segments improving operating profit contribution except for the Financial Services business, which was marginally lower than the prior year. The Import and Distribution business generated an increase of R85 million (10%), the South African Retail and Rental segment an increase of R684 million (>100%) year on year. The international operations in the UK and Australia benefited from strong government support and economic recoveries, resulting in an increase of R741 million (>100%) for the year. The Aftermarket Parts business generated an increase of R237 million (74%).

The increased operating profit is mainly as a result of the faster recovery of the automotive industry which positively impacted gross income, coupled with the benefits achieved through the implementation of various cost-cutting measures introduced in the prior year. The operations benefitted from increased volumes supported by good inventory availability of new and pre-owned vehicles, and parts and accessories in the Aftermarket Parts business, allowing us to service pent-up demand following the initial lockdowns.

Net finance costs decreased by 51%. The decrease is mainly as a result of the decline in core debt and floor plan debt, as we aggressively reduced the car rental fleet and inventory levels. We generated a gain on unwinding of the interest rate swaps.

Foreign currency exchange losses amounting to R99 million (2020: R13 million) relate to the revaluation of balances denominated in foreign currencies that do not qualify for cash flow hedge accounting in the normal course of business. These include forward exchange contracts (FECs) and options (through profit or loss), trade receivables, trade payables and customer foreign currency (CFC) accounts. The severe volatility of the ZAR during the year negatively impacted mark-to-market measurements.

During the year we also experienced abnormal losses amounting to R284 million, due to the cancellation of FECs. As a consequence of erratic global inventory supply constraints due to the COVID-19 crisis, initial production orders that had been placed could not be fulfilled as scheduled, leading to the breakage of the hedge relationships. Subsequently, new orders were placed and new hedge instruments were entered into.

Profit before tax increased by 429% to R2 860 million.

Net working capital resulted in a net cash inflow of R1 778 million, primarily due to lower inventory assisted by improved sales, lower vehicle returns from car rental companies and, more recently, supply constraints on certain vehicle models.

Return on invested capital increased to 14,8% (2020: 6,4%) mainly due to improved profitability and lower average invested capital. Weighted average cost of capital decreased to 9,5% (2020: 9,8%) primarily due to lower cost of debt and lower average invested capital.

A full year dividend of 415 cents per share has been declared. An interim dividend of 160 cents per share was paid and the final year-end dividend of 255 cents per ordinary share was declared. Due to the economic crisis no dividend was declared and paid in 2020.


Revenue

R87 205 million (2020: R73 417 million)

 19%


Operating profit

R3 795 million (2020: R2 136 million)

 78%


Profit before tax

R2 860 million (2020: R541 million)

 429%


Free cash flow generated from operations

R5 904 million (2020: R3 004 million)

Net debt to EBITDA
(debt covenant)

0,8 times (2020: 2,2 times)
Required: to be less than 3 times

EBITDA to net interest
(debt covenant)

10,9 times (2020: 3,6 times)
Required: to be greater than 3 times

Debt and liquidity

Net debt to equity is 28% (2020: 60%). Core debt (excluding floorplan and IFRS 16 debt) decreased by R3,3 billion primarily due to the lower working capital and vehicles for hire levels. This was further positively impacted by profits generated and no dividend paid in September 2020.

Net debt to EBITDA is 0,8 times (2020: 2,2 times) and EBITDA to net interest is 10,9 times (2020: 3,6 times). Both ratios have been calculated by applying the funders covenant methodology and we remain well within the bank covenant levels as set by debt providers of below 3,0 times and above 3,0 times, respectively.

We generated significant free cash flow of R5 904 million (2020: R3 004 million) from operating activities before capital expenditure for vehicles for hire. The free cash flow was primarily generated by solid operating profits, decreased finance costs, and reduced working capital.

Our liquidity position remains strong with R15,3 billion in unutilised funding facilities. A total of 42% of the Group's debt is long-term in nature and 54% of the debt is at fixed interest rates. Excluding floorplan debt, which can be seen as part of the working capital cycle, 65% of the debt is at fixed interest rates.

Strategic acquisitions

During the year, we concluded select acquisitions to support the longer-term strategy of the Group. These businesses will enhance operational synergies and accelerate innovation in existing businesses.

These strategic transactions included:

  • Six passenger dealerships in South Africa, two passenger dealerships in Australia and one commercial operation in the UK.
  • Midas stores in Aftermarket Parts.
  • The remaining 40% shareholding in Motus Vehicles Distributor Proprietary Limited (formerly Renault South Africa Proprietary Limited).
  • An additional 10% shareholding in SWT Group Proprietary Limited (Australia).
  • An investment in Synapt Proprietary Limited, which owns 100% of getWorth Proprietary Limited. Subsequent to year-end, the Group acquired an additional 11% shareholding, increasing effective ownership to 60%.

Reliable reporting

Internal financial controls that operate as intended form the backbone of effective financial reporting. The overall design and effectiveness of internal financial controls requires sufficient rigour to ensure that the required and appropriate level of reliance can be placed on them in producing the Group's financial information and disclosures. The changes to the JSE Listings Requirements have meant that the CEO and CFO need to be comfortable that this is the case and the Group's combined assurance activities, incorporating both internal and external audit, have confirmed that the Group's financial controls are operating effectively, in line with their intended purpose.

Prospects

Our strategic agility during the year and the actions we have taken allowed us to stabilise the business and generate outstanding financial results and significant cash flows in the unpredictable environment in which we find ourselves.

Hand-in-hand with the agility the Group has shown, we have maintained a strong control environment to minimise the risk of any 'own goals' that may exacerbate the impact of challenging trading conditions. We have been able to demonstrate that agility and control, grounded in robust systems and visibility of policy compliance in every corner of the organisation, are not mutually exclusive.

We expect to deliver growth in operating and financial results for the coming year, provided there are no further stringent lockdowns, severe vehicle inventory shortages from local OEMs or incidences of social unrest in South Africa. We have sufficient cash available and a strong balance sheet to support investment in strategic growth initiatives and may consider share buy-backs as the opportunities arise.

My thanks go to our people, customers, suppliers, funders and stakeholders for their unwavering support during these challenging times; and specifically, to the financial management teams across the Group for their efforts in ensuring financial planning, monitoring and disclosure of a high standard notwithstanding the complexities of an unpredictable environment.

Ockert Janse van Rensburg

Chief Financial Officer

20 September 2021