Recent changes announced by the McCarthy Group, including the creation of McCarthy Bank, came as no surprise to industrial analysts and other market pundits.
The company has been languishing in no-man’s land for 18 months and analysts have expressed concern about a lack of clear direction at the top of the company. Directors had punted the concept of diversification to offset the cyclical nature of the motor industry. Last year the company first sold and then re-purchased FirstPref Retail Sales, which owned the Beares Group debtors book.
How seriously should investors take McCarthy’s venture into the creation of a bank and how will this new direction benefit (or not benefit) the group?
The question is whether this bank, which is to be run by Colin Franks, can emulate companies like Super Group and Imperial, which have been successful in moving from motor retailing to banking. Will the bank be a niche operator in vehicle financing or will it target other sectors of the economy?
Franks is adamant that he will be independent to make that choice. The new bank has the advantage of being able to ride off the back of its parent company’s large customer base and established infrastructure.
The McCarthy motor division must be an attractive (even unavoidable) option for the bank. It holds 15% of the new vehicle market, which equates to sales of R6- billion a year. One problem of niche vehicle financing is that investors could see income diminish as motor sales decline with global trends.
However, Franks points out that less than 30% of McCarthy Bank’s lending is in vehicle finance. He indicates that, since the creation of the bank in November 1997, most of the business has come from commercial lending.
If this bank is indeed aimed at the commercial and corporate environment, how will it compete against the conglomerates that are being formed through, among others, the mergers of Anglo American and Rand Merchant Bank? The answer will only be found in the company’s future results. A strong performance will persuade investors that it has focus, that it can grow without relying on acquisitions or growth of debtors books and that it is on the road to success.
On the negative side, investors are uncertain about the group’s recent losses, the sale of Beares and global motor industry problems. According to an International Monetary Fund survey released in April, 35% more vehicles are being manufactured internationally than are being bought.
And while the group may have lifted attributable income by 15% to R141-million for the six months to December 1997, pressure on margins (particularly on motor vehicles) accounted for a 4% decline in income before interest.
Analysts believe that McCarthy Retail will show strong growth from its Prefcor divisions, with Game Discount World, Bonus Building Supplies and Clobea each lifting operations by more than 30% in 1998/1999.
A strong financial performance could see the share price rise. However, the extent is difficult to measure, given the nature of the motor trade and the perception that the company’s main source of income is from this industry. Best estimates see the company improving its rating in 1998.
Assuming that results are positive, McCarthy Retail could see its price/earnings ratio rise from its current 10,2 times to about 13 times. This could see the share price rise from its present level of 700c to 900c in 1999.
Jacques Magliolo is an investment strategist for stockbrokers CA Miller Raw & Company