2 Cheap reflects on ‘challenging’ times
NZ Automotive Investments (NZAI) says the first four months of the current financial year have been challenging as it battles internal and external factors, including its board and senior leadership facing an overhaul.
The parent company of 2 Cheap Cars issued a trading notice to the NZX the day before the resignations from the board of three non-executive directors and executive director and co-founder Eugene Williams came into effect.
Michael Stiassny and Gordon Shaw were appointed as new independent directors on August 21 and shareholders will vote on installing them permanently at the annual shareholders’ meeting on September 2.
NZAI says the update follows a turbulent period that has also seen the resignations of chief executive David Page and the company’s external auditor, while its bank told the business it is unable to provide assurance of support for finance beyond its current agreements.
“The overall environment of the first four months of the new financial year has been challenging, with inflationary pressure, economic uncertainty and rising interest rates all contributing to a tightening of household budgets,” explains NZAI.
“In addition, a considerable amount of time and effort has been spent managing changes at the board and senior leadership levels.
“It was a slower start to the financial year in terms of vehicle sales with the business continuing to navigate the Covid-19 omicron variant in April.
“Despite this and other distractions, the automotive retail side of the business has had a reasonable performance in the first four months of the financial year, selling on average 779 vehicles per month from May onwards.”
Sales revenue up
The company notes unaudited revenue from sales between the start of April and the end of July this year was $24.9 million, up 13 per cent from the same period a year ago. This was despite the 3,164 vehicles sold dropping 4.3 per cent from 3,208 over the same timeframe.
It explains this reflects price increases on vehicles sold being passed on to cover the rising cost of cars bought from Japan. “Gross margins over the period were tight but improved from June onwards once pricing adjustments were made,” adds NZAI.
The August 19 update adds that 2 Cheap Cars is well positioned to meet the increasing demand for hybrid and electric vehicles (EVs) following the rollout of the government’s full clean car discount scheme on April 1.
It says the proportion of hybrid and EV sales increased to 40 per cent of all vehicles for the first four months of the financial year, up from 21 per cent during the same spell in 2021.
“This has helped 2 Cheap Cars consolidate its position in the used car market, with estimated market share increasing to 7.4 per cent, up from 6.9 per cent in the same period last year.”
NZAI notes the number of used cars registered in New Zealand for the first time was down 10.9 per cent for the period.
‘Slow start’ for finance
The company’s statement reveals vehicle finance income has “had a slow start” and was down nearly 15.7 per cent on April-July last year. The number of vehicles sold with finance was down 21 per cent.
“This was due to a number of factors, including: the ongoing challenges resulting from changes to lending standards which made it more difficult for some customers to access consumer finance and also increased time for our third-party providers to process applications; the effect of the subsidies for clean cars; changes to the company’s finance and insurance team; and general tightening of household budgets and rising interest rates in an inflationary environment,” it adds.
NZAI’s investment in marketing, lower sales volumes, and the reduced performance of the finance and insurance side of the business were key factors in the drop in underlying net profit after tax to $828,000, compared with $1.36m for the same period last year.
Operating cashflow improved to $3.9m, up from $2.3m last year, which the company attributed to a 22 per cent reduction in inventory levels since the end of March this year.
The company says it is in a sound financial position and as of July 31 was in compliance with its banking covenants and cash of $6.4m, net debt of $4.9m and total equity of $15.5m.
The update continues that NZAI has expanded its dealership network with a new branch in New Lynn and plans to expand its Wairau Valley site on Auckland’s North Shore.
It also adds that NZAI has hit a pause on lending from its finance division, NZ Motor Finance. “The board had been considering the company’s finance company strategy, and whether that remains the most appropriate use of the company’s capital,” the company says.
“Because of this, lending was paused in June, with the loan book reducing from $6.8m at March 31, 2022, to $6.3m at July 31, 2022. Due to the effect that the cost-of-living is having on borrower’s ability to service debts and the fact that the loan book is being repaid to a lower level, arrears exposure on the loan book stood at 3.4 per cent at July 31, 2022.”
