|
Super Group (SPG) will be the stock in focus: (Price at time of writing: R40.77 as 28 August 2016)
|
Related Topics |
Background and overview of Super Group
Super Group is a leading transport logistics and mobility group, headquartered in South Africa. The Group includes supply chain, dealerships and fleet solutions businesses focused on offering a comprehensive range of services, utilising world-class skills and technology. The Supply Chain division comprises Supply Chain Africa (consisting of Supply Chain South Africa and African Logistics) and Supply Chain Europe (representing the 75% interest in IN tIME acquired effective 2 November 2015);
The Fleet Solutions division comprises FleetAfrica and SG Fleet (Super Group’s 52% interest in SG Fleet Group Limited, a listed Australian fleet management business); the Dealerships division comprises Dealerships SA and Dealerships UK (being the 100% interest in Allen Ford (UK)) and Services. For more info on Super Group go to www.supergroup.co.za
Supergroup used to be the darling of the market, until they got consumed by debt while management continued to pay lavish dividends even though they had mountains of debt. Eventually the bubble popped and it's taken years and a lot of hard work for Supergroup to get back on track. Question is whether they are leaner and meaner than ever before? We take a look at the financial results below.
The Fleet Solutions division comprises FleetAfrica and SG Fleet (Super Group’s 52% interest in SG Fleet Group Limited, a listed Australian fleet management business); the Dealerships division comprises Dealerships SA and Dealerships UK (being the 100% interest in Allen Ford (UK)) and Services. For more info on Super Group go to www.supergroup.co.za
Supergroup used to be the darling of the market, until they got consumed by debt while management continued to pay lavish dividends even though they had mountains of debt. Eventually the bubble popped and it's taken years and a lot of hard work for Supergroup to get back on track. Question is whether they are leaner and meaner than ever before? We take a look at the financial results below.
Scroll over or click on the funnel chart to get more details of SPGs latest financial results
Financial review:
In Super Groups last set of financial results they obtained a operating margin of 6.5% and a net profit margin of 4.8% (this is a very similar margin to the 4.9% achieved in their half year results). The industry they are in is a extremely competitive and to keep new business coming in, margins will be squeezed as clients can easily find a new supplier of the service SPG provides if they feel that SPG is to expensive. So buyers of SPG shares should not expect much higher profit margins than what SPG is currently getting.
One might have expected that fuel price declines might have helped margins but most contracts are set in such a way that they take petrol price movements into account. This is not only to protect SPG against squeezed margins when petrol prices increase, but to protect their clients from overpaying if petrol prices decline. Investors in SPG should make peace with the fact that margins will in all likelihood remain at around the 5% level.
Diluted core headline earnings per share for SPG came in at R3.08, placing SPG on a PE ratio of 13.2, which considering the market average is not very demanding at all.
One might have expected that fuel price declines might have helped margins but most contracts are set in such a way that they take petrol price movements into account. This is not only to protect SPG against squeezed margins when petrol prices increase, but to protect their clients from overpaying if petrol prices decline. Investors in SPG should make peace with the fact that margins will in all likelihood remain at around the 5% level.
Diluted core headline earnings per share for SPG came in at R3.08, placing SPG on a PE ratio of 13.2, which considering the market average is not very demanding at all.
The graphic below shows the contribution of SPGs major regions their revenue . South Africa remains the region where they earn the bulk of their revenue, with the UK region coming in a distant second and Australia coming in ahead of SPG's European regions (excluding the UK).
Cash generated per share for SPG amounted to close to R8.30 per share. For SPG as a whole they generated close to R2.9billion in cash during the financial period in question. This shows that SPG is extremely cash generative and that the profits generated are not paper profits (I.e asset revaluations) but actual cash business taking place. In addition to this they are sitting on a cash pile of R3.12billion (or around R9.30 per share).
The only concern (as we had in our previous set of financials for SPG) is the build up in inventories during the financial period. The question is whether this is a planned build up of stock, or whether stock is taking long to be moved to consumers. Our guess is consumers are under severe pressure and they are struggling to move the stock off car dealership floors. This suspicion is supported by the fact that there is a severe slow down in new car sales in South Africa. Possible and current investors in Supergroup should keep a close eye on their inventories. If it continues to grow, one can expect lower margins from SPG as they start dropping prices to move stock sitting in inventories.
They share the market with strong competitors. Especially in the transport and logistics space. Thin Grindrod, Onelogix, Value logistics all active in this sector. Greater competition leads to lower margins (unless a niche market is served, which of the aforementioned Onelogix is covering with the movement of abnormal load cargo).
The only concern (as we had in our previous set of financials for SPG) is the build up in inventories during the financial period. The question is whether this is a planned build up of stock, or whether stock is taking long to be moved to consumers. Our guess is consumers are under severe pressure and they are struggling to move the stock off car dealership floors. This suspicion is supported by the fact that there is a severe slow down in new car sales in South Africa. Possible and current investors in Supergroup should keep a close eye on their inventories. If it continues to grow, one can expect lower margins from SPG as they start dropping prices to move stock sitting in inventories.
They share the market with strong competitors. Especially in the transport and logistics space. Thin Grindrod, Onelogix, Value logistics all active in this sector. Greater competition leads to lower margins (unless a niche market is served, which of the aforementioned Onelogix is covering with the movement of abnormal load cargo).
A few financial ratios to mull over for SPG (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 1.45 (more than 2 shows high levels of financial leverage).
- Current Ratio: 1.29 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 0.89 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 5.52%
- Return on Equity (ROE): 13.53%
- Net Profit Margin: 4.85%
- Dividend Yield: 0%
Valuation:
Based on SPG current financial results, its foothold in the industry, the market they operate in, and their strong cash position and cash generation capabilities we value SPG at between R53.90 and R54.20. This valuation is a little lower than our previous valuation on SPG, but this is to account for the greater risk in the company (especially with regards to the massive build up in their inventories), which they will have to get rid of at some point, and possibly at lower prices and this will squeeze margins and future earnings a bit.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question