The world is changing fast and to keep up you need local knowledge with global context.
By Sasha Naryshkine
Imperial Holdings yesterday officially communicated its separation dates. Its Stock Exchange News Services (SENS) announcement confirms the famous name will stay with the half of the business which is to become Imperial Logistics.
This company’s business spans its South African home market and the rest of Africa, with a well established European business in the “International” segment. Imperial Logistics revenues are spread across many diverse operations, some with a more defensive nature in healthcare and others more cyclical, such as mining and manufacturing.
The other half of the business to be unbundled from Imperial Holdings as a distribution in specie is the motor vehicle retailing operations , known as Motus which will assume JSE share ticker MTH. Motus stock will begin trading next Thursday (22nd November). The combined value of the new Imperial and Motus are likely to trade close to next Wednesday’s closing price of the existing combine now known as Imperial Holdings.
Or so goes the theory, in practice there are different shareholders, both new and existing with different views.
There are no dividend tax implications for shareholders in the unbundling process. They will receive one Motus share for every Imperial share.
Motus revenues are dominated by motor vehicle retail and its rental operations which are SA’s market leaders (Europcar and Tempest). Well-known brands such as Hyundai, Kia, Mitsubishi and Renault will continue to service the more affordable mid-range motor vehicle market.
Imperial is 70 years old, 30 of which as a JSE listed entity. From the humble days of Barney’s Super Service Station it developed to scale which led to a decision in 2014 to split the then R100 billion revenue business into what from next week will henceforth be known as Motus and Imperial Logistics.
Like many other industrial businesses, the group reaped benefits of buoyant growth after South Africa rejoined the world in 1994. The company was wonderfully led for years by the much-admired late Bill Lynch, a man who received the Ernst & Young World Entrepreneur of the Year in 2006. I recall the TV interview clearly – an unassuming man of Irish heritage, who had made South Africa his place, and certainly he had made a big difference.
For the combined business, the last half a decade operating environment has been tough with SA struggling to overcome the challenges of high unemployment, mushrooming public debt and poor GDP growth. Overlaying that was a lack of business confidence stemming from poor political governance.
Current stockholders (as per the 2018 annual report), include the PIC at 10.77%, Lazard Asset management LLC at 10.31% percent and Prudential at 8.79 percent.
The unbundling was partly motivated to overcome the disappointing share price performance of the past five years, with the price down R50 from five years ago. Dividend receipts of R37.70 have offset much of that reverse. But the board expects fresh energy released by the unbundling will boost profitability and returns for investors.
Part of the rationale of separating the two businesses is that the market will give the separated and more focused businesses a higher rating. In other words, Price to Earnings expansion on the same earnings, given that the outlook is sunnier for nimbler entities. The two businesses have been run independent of each other for around two years. All the debt has been separated and taken on by the separate entities, it is a “clean” break.
How is the market expected to react and more importantly, rate the separate businesses relative to their expected earnings?
Motus is a more South African centric business tied to the local consumer but vulnerable to and economic growth and a volatile currency.
One thing is sure, South Africans in the middle classes (and worldwide for that matter) aspire to own motor vehicles of their own. Motus currently accounts for one-fifth of the South African new motor vehicle annual trade. It has established footholds in the UK and Australia, laying the foundation for future expansion.
The more defensive nature of Imperial Logistics may well lead to a lift in market valuation over the short-term as South Africans batten down the hatches ahead of the 2019 general election.
It is a less cyclical business that its soon to be a separated twin. Investors may well be attracted by the African exposure and the more stable outlook for the exposure to defensive areas such as healthcare.