Daily Equity Report

I attended Imperial’s management report back to the investment analyst society today in order to start gaining an understanding of the nature of business conditions. Larger groups have multiple divisions, which are each differently affected by the economic slowdown.

The company released annual results yesterday and these were dissected by management, led by CEO Hubert Brody.

Operationally the business operated in a difficult environment, but from a cash generation perspective, it did extraordinary well. After having fallen to a price of R40 from over R160, the price has recovered back to R80, but fell 2,7% to 7598c today.

The R16 billion market cap company had a turnover of R52 billion, but margins down to 4,7% resulted in operating profit at R2,4 billion.

Imperial has a number of divisions, logistics, car rental and tourism, distributorships, motor vehicle dealerships and insurance.

After tax profits came in at R1,1 billion down from R1,4 billion, but cash flow for the business was strong with operations generating free cash flow of R2,9 billion, largely due to improved working capital management. This figure was R1,8 billion in 2008.

Over the last 2 years the business has therefore retired debt which stood at R11 billion to the current net debt (i.e. after cash on the balance sheet) of R5,1 billion. Imperial largely being an asset based company has traditionally run at higher debt to equity levels. In June 2008 the net debt to equity ratio stood at 81%, now this ratio is at 50% with the target being 60-80%.

In other words it’s running at below the lower band, but this is probably correct in the current environment. Even at 50% this is fairly conservatively.

In terms of the balance sheet management, management will want to be more expansionary in lighter asset based businesses with higher returns and margins, such as logistics, tourism and selected financial services. Part of the thinking is that while this may be initially more expensive to buy, their organic expansion does not require as much capital injection and this should be enhancing for return on committed capital.

While dealerships and distributorships contributed 56% of turnover they only contributed 31% of profit. The SA logistics businesses at 19% of sales contributed 29% of operating profit. As with most divisions the second half of the year was much weaker than the first half. This division produced R738m for the full year.

Car rental and tourism produced R336m in operating profit with an improvement in second half.

Distributorships and dealerships, where there has been a lot of pain due to the collapse in the new car sales market, produced profit of R770 compared to R1,2 in previous year.

The insurance business, Regent Group improved profit from R227 to R315 with the second half up massive 209%, but this included profits on investments. Underwriting profits are however improving off a low base.

Overall this was a good result and management is convinced that at the current level of car sales their dealerships and distributorships are at the right size having being scaled back. The balance sheet has fair gearing. They are looking for Regent to be more outwardly focused after a period of consolidation.

The car sales business will continue to be difficult given that banks are not financing at present. But should this pick up then there is the benefit of operational gearing. I.e. a lower cost base with boosted sales has a geared impact on the bottom line.

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966