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2011-12-19 Imperial Holdings Limited (IPL) operates in the logistics, car rental/tourism & retail motor (including allied financial services) industries. Although 87% of its profit emanates from South Africa, it also operates in other parts of Africa, Europe & Australia.

Distributorships

The import & distribution of a range of passenger, commercial vehicles, automotive products, industrial equipment, motorcycles & light aircraft; on behalf of local & international principals.

Effective 1 March 2011 Imperial was awared the distribution rights for Lamborghini, and from 1 July 2011the Mitsubishi passenger & light commercial vehicles distribution rights. This is in addition to the existing Hyundai, Kia, Daihatsu and Bentley rights. Motorcycle brands include Kawasaki, Aprilia & Triumph. Imperial has jvs for the distribution of Renault, Tata and Chery vehicles. Vehicles are distributed into southern Africa to own & independent dealers.

There are Australian dealerships for Mitsubishi Motors & Ford.

Autoparts distribution is active in the wholesaling & distributing of parts & accessories for vehicles outside their manufacturer warranty & service programmes. In 2010 Imperial acquired Midas, which contributed strongly in FY2011 (but only contributed 7 months in FY2010). This is in addition to Alert Engine Parts (a distributor of engine components) and Turbo Exchange (distributor & refurbisher of turbochargers).

In 2011 Imperial acquired E-Z-GO South Africa, the leading brand of golf carts (which also provides after-sales service & spare parts). Goscor was also recently acquired - they are primarily involved in the import, distribution & rental of forklifts, cleaning equipment & specialised welding, tooling & powered products. Goscor also provides after-sales parts & service for brands including Crown, Doosan, Bendi & Tenant. Also in the industrial distribution division is Graffiti, a specialist in outdoor media like hot-air balloons, vehicles & truck branding.

NAC's services include new and used aircraft sales, maintenance, flight operations, pilot training & chartering of fixed-wing & helicopter products. Having relinquished the Hawker/Beechcraft distributorship, NAC obtained exclusive dealership for Piper aircraft in sub-Saharan Africa as well as dealerships & distribution for Falcon jets, Kodiak Quest, Nextant 400XT & Netjet Flight Options. NAC is an authorised dealer for Bell & Robinson helicopters, Diamond, Tecnam, Pacific Aerospace, Daher-Socata, Dassault Falcon & Embraer jets. Earnings from NAC have been declining due to lower demand & lack of availability of bank funding.

Retail motor

Imperial have over 200 new & used vehicle dealerships. Also owns Jurgenis Ci (the only large-scale caravan manufacturer in SA) and Beekman Canopies, which makes fibreglass canopies in Bellville. '

Imperial has a number of distribution and franchise rights - the relationships built up with principals and suppliers, which have been entrenched over time, are key to their success, and they carefully manage distribution & franchise agreements which govern these relationships.

In FY2011 in SA Imperial sold 96,453 new (including 11,477 new vehicles sold to outside dealers) & 54,746 used vehicles; which was 21% and 4% respectively higher than the previous year. In Australia & the UK 9140 new vehicles (11% increase) and 3,841 used vehicles (9% higher) were sold.

A risk facing the dealerships is that the car-makers go bankrupt, as General Motors & Chrysler nearly did in 2009.

On the expense side, the 3 highest value overhead expenses in a typical dealership are staff costs, property rentals & demonstration vehicles/petrol.

To get an idea of how Imperia's retail motor sales have done subsequent to their last reporting period, we can look at new vehicles sales, which indicate how the industry's sales as a whole are doing, which may translate into how Imperial Holdings' sales have done (depending on Imperial Holdings's exposure to the brands). To this end it's heartening to hear of improved new vehicle sales in November, but less good to hear that the price of second hand vehicles could decrease in the coming year.

What factors impact new car sales:

• Disposable income, which is impacted by many factors - fuel, food & electricity prices, level of indebtedness & interest payments thereon.

• The average buyer requires finance, so any change in lending conditions & rates

• New ranges (e.g. Imperial Holdings have launched the importation & retail distribution of the MG in the second half of their 2012 financial year, & it will be marketed from 7 Group & 5 independent dealerships)

• The price of vehicles, which is impacted by many factors, e.g. the depreciation in the Rand could impact vehicle prices, an increase in interest rates increases the repayment schedule, carbon emissions tax

Should sales reduce then inventory could be decreased & unprofitable operations closed (although in some instances the lease rentals may have to be carried although the premises are vacant). Imperial monitor their stockholding carefully, with detailed research on trends & buying patterns done before new models are launched and cheivles ordered.

Imperial claims to be the "leading aftermarket parts supplier in South Africa". The parts & workshops/services provide a steady & dependable base of income, from cars in the 1 to 5-year old range. It's unfortuanately not clear what portion this makes up of the retail motor profit.

Car rental & tourism

Vehicles are bought, rented to clients, repaired & sold. Car rentals are sold under the Europcar, Tempest Car Hire, Maui motorhome rentals, Gage Car Hire (insurance vehicle replacement) and Britz 4x4 rentals. Used car sales are under the Autopedigree, Imperial Auto Auctions & AA Autobay (facilitates private to private vehicle sales through its website) brands. Panelshops are Imperial Autobody and Danmar Autodbody. The tourism division comprises Springbok Atlas charter and Edutravel.

Tourism operations include include inbound tour operations & niche tourism services. One in 3 car rental transactions in SA is done through Imperial.

In 2009 Imperial disposed of Tourvest.

Their profit in part depends on the prices achieved on the sale of replaced fleet vehicles, and in FY2011 they experienced a "sluggish used car market". They also predicted that the second hand car market would "continue to be affected by favourable new car prices and the current oversupply of used cars".

A weak ZAR exchange rate increases foreign tourists to South Africa and therefore car hire business from them. It's also a boost to Imperial's tourism operations.

Should demand change, then the fleet size is adjusted.

Fleet management

In 2010 Imperial entered the vehicle tracking & fleet management industry by acquiring 25.5% of MiX Telematics, and launched Imperial Fleet Management in a joint venture with WesBank.

Logistics

Logistics solutions involve transportation, warehousing, inland waterway shipping, container handling and related value-added services. Imperial's logistics division operates in 2 key markets - southern Africa & Europe.

Imperial have a transport fleet of over 6800 trucks, access to over 5000 subcontractor vehicles and warehousing capacity of over 1.7 million square metres. Imperial operate 600 vessels in Europe.

In 2010 Imperial acquired Goscor to expand into industrial distribution.

In 2010/2011 Imperial acquired CIC holdings as a first step towards expanding its African footprint in logistics, and created a seperate Africa logistics division. The margin in the combined southern African & European logistics declined to 5.5% in FY2011, mainly due to the inclusion of CIC Holdings Limited & operational difficulties in the Cold Chain (which is an important unit in the consumer logistics division). "Due to the nature of its business, CIC earns lower margins but generates strong returns on capital."

On 26 Jan 2012 Imperial Logistics announced that it had acquired a majority stake in King Transport, for an undisclosed amount. The rationale is to strengthen the company’s ability to “service customers that move less than full truck loads from source to market”. Moving loads ranging in size from 500 kg to 32,000kg, Kings Transport services customers ranging from home-based businesses to blue-chip brands.

Imperial's view is that most South African organisations conduct their transport & warehousing in-house, creating the opportunity for growth at around 2 to 2.5 times GDP growth, and that the "logistics industry in the rest of Africa offers equally exciting growth prospects". Kings head office is in the Western Cape, with branches located in Johannesburg, Durban and Port Elizabeth. Kings has 225 employees.

Financial services

"Comprises the insurance operations which are focused on a range of short-, medium- and long-term insurance and assurance products that are predominantly associated with the automotive market, the sale of warranty and maintenance products, income from joint ventures on the sale of financial services, cell captive arrangements and factoring of premium finance operations."

Imperial's life and short-term insurance business is Regent - it underwrites warranties & manages significant warranty funds through SA Warranties, and sells funeral policies to the emerging market. Regent also operates in Botswana & Lesotho, owning 100% of Cedar Employee Benefits (which provides pension & medical aid broker services).

LiquidCapital is a business that offers a broad range of financial services to the motor trade, including vehicle financing (mostly in JVs), service & maintenance plans, manufacturer warranties, roadside assistance. LiquidCapital's distribution channels are its call centres, and the Imperial & independent dealer network - it has a sizable telemarketinh operation, though which Regent products are also sold.

In 2009 Imperial sold its remaining 49.9% holding in Imperial Bank to Nedbank, contributed R179m in FY2010 (Imperial had previously sold 50.1% to Nedbank in 2001)). In 2011 Imperial created a new financial services division.

Major assets

Imperial's major assets include a rental fleet, a transport fleet, ships/barges, buildings and inventories.

An acquisitive company

Imperial have been actively involved in a number of acquisitions in 2010 and 2011, which is not a surprise as their "management system actively encourages acquisition, nurturing and growth of large and small entrepreneurial business units, and strives to maximise the synergies between them...We continuously seek new businesses that fit the profile of our three pillars (logistics, car rentals/tourism & the distribution & retailing of motor vehicles, industrial equipment & parts and related financial services). For example, industrial products and automotive parts has been a recent major thrust, significantly enhancing our distribution and retailing pillar. As a result, we ensure our business mix is always relevant and that we continue to command strong positions in all the industries where we are active".

There's always a risk in carrying out acquisitions, that they wont work, and the lower the portion of the value residing in recent acquisitions, the easier it is to analyse the value offering of the company.

Acquisitions & disposals

Looking at the numbers, in 2011 Imperial spent R687m on expansion capital expenditure, and received R477m from the sale of Imperial Bank Limited. The sale of Imperial Bank I see as a positive, as banking does not have a lot of overlap with the rest of the business, and the move creates greater focus. However, one needs to be careful in looking at previous years to remove the impact of Imperial Bank.

Dividend

Over the FY2011 a dividend of R4.80 was paid.

TNAV

Imperial Holdings's value was underpinned by a tangible net asset value of R4.59 per share on 31 Aug 2011.

Valuing Imperial Holdings

I value Imperial Holdings by first guestimating the sustainable income, and then adjusting for some balance sheet items and considering what may have happened since the 31st August 2011. Obviously there are many other ways of carrying out a valuation, and please leave your feedback if you think you have a better way.

What is the sustainable income?

Nobody knows what the future sustainable income is, but I guestimated it by looking at what happened in the last 5 years. I adjusted all the financial years for acquisitions and operations discontinued in the 2011 financial year (assumed the operating profit was the same in all years), and for Imperial Bank I assumed an after-tax profit of R121m in prior years (know that the before tax profit was R175m in 2010).

These numbers are before the amortisation of intangible assets arising on business combinations, and also leave out forex gains/losses, gains on the Lereko call option and financing cost.

* Includes R17m contributed by MiX Telematics

The average adjusted operating profit over the last 4 years was R2572m, which equates to more or less R26bn present value (using various assumptions which pleasingly boil down to multiplying by approximately 10!)

Adjusting for balance sheet items

The calculation of present value of the sustainable income, excludes finance costs. I'm not sure of the extent to which the other non-current liabilities are covered in the calculation of sustainable income, so to be prudent I subtract the following out:

• Non-redeemable, non-participating preference shares R441m

• Retirement benefit obligations R233m

• Interest-bearing borrowings R7508m

• Insurance, investment, maintenance & warranty contracts R2465m

• Non-current financial liabilities R323m

• Net current tax liabilities less deferred tax assets R274m (R386m - R112m)

I have also added net working capital of R3245m and cash resources of R3531m back in, as this is value which can be realised over time.

This gives a total valuation of about R103 per share (of course if you think that the year to 30 June 2011 is more indicative of future results than prior years, then you'll get a higher valuation). You may also assume higher future growth rates, and get a higher valuation.

Car vehicles sales going forward

The rearview mirror is oh so clear, but it's difficult to say what's going to happen going forward. November 2011 new car sales are some 12% higher than November 2010's, but this is counterbalanced by the view that the price of second hand vehicles may decrease.

Exchange rate movements

The elephant in the house is the exchange rate, which has depreciated by about 20% against the USD and about 10% against the Euro 31 August 2011. A weakening in the exchange rate may feed into certain types of inflation (including the cost of imported vehicles), resulting in a deterioration in purchasing power. Over the shorter term, though, the stock which is held will presumably have been purchased at prices based on an older (stronger) Rand exchange rate, so it may take a little while for this impact to flow through. That part of the business which is based offshore will see its value go up along with the depreciation in the Rand. Imperial's tourism operations may be positively impacted by the weaker rand.

Whilst the Reserve Bank kept rates constant in November (at a 30 year low of 5.5%), it assessed risks to inflation to be on the upside as a result of the exchange rate. My guess is that whilst the Reserve Bank will try to delay doing so as long as possible, the next move in interest rates will be up. This must be a negative on Imperial Holdings, as it results in it being more expensive to finance the purchase of motor vehicles.

Conclusion

I could well be wrong, but I estimate the fair value of Imperial Holdings to be somewhere between R90 and R110 per share. I certainly wouldn't advise anybody to trade on this information, without applying their own mind to the facts (the facts are subject to varying interpretations, and even the facts change continuously, and by the time you read this they'll have changed already).

Trading Imperial Holdings

Disclosure

This article's author has various interests in the Imperial Holdings Group.

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