2 Cheap reset delivers gains
NZ Automotive Investments (NZAI) has reported a jump in its vehicle sales and underlying net profit for the 2023 financial year, largely driven by significant increases in the last quarter to the end of March.
It marks the end of a turbulent year for the business, which is the parent company of 2 Cheap Cars, after wholesale changes at the board and management level and having to find a new external auditor and arrange a replacement trade finance facility.
Paul Millward, chief executive officer, says the board and management are pleased to see solid progress being made having spent six months resetting the foundations of 2 Cheap Cars.
Key results for the year to the end of March, which were announced on May 29, include NZAI’s revenue and income increasing 25 per cent from the prior period to $82.7 million.
It says this was driven by a boost in sales volumes – with vehicle sales growing six per cent to 8,367 units – combined with an inflationary uplift in the prices of vehicles sold.
Gross margins have “notably improved in the last quarter on the back of optimised pricing and effective promotional activity”, as well as improved finance penetration. NZAI notes the full-year contribution margin is up 18 per cent to $14.8m.
Operating costs, excluding non-recurring costs, have rose 2.3 per cent to $8.8m, due to additional investment in marketing.
Underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA), including finance income, increased 26 per cent to $6m in the last financial year.
Non-recurring costs of $1m associated with significant changes at board and management level in the 2023 financial year and a one-off lease gain of $900,000 in the previous period led to net profit after tax (NPAT) halving to $1.3m.
However, NZAI reports its underlying NPAT for the past financial year, excluding the non-recurring costs, increased by 18 per cent to $2m. “The profit in the last quarter represented 40 per cent of the total year’s profit,” it adds.
Net operating cash flow excluding lending improved to $10.9m, up from $600,000 for the same period a year earlier. “This is largely due to EBITDA profit and reduced inventory levels resulting from shipping constraints, coupled with more efficient stock management.”
NZAI adds that underlying earnings per share have come in at 4.4 cents per share (cps) against 3.7cps for the 2022 financial year.
“As at March 31, 2023, the company is in compliance with all banking covenants and has cash of $3.8m, no net debt and total equity of $16.2m,” it says.
NZAI has appointed UHY Haines Norton Sydney as its new auditors and agreed a replacement trade finance facility for $5m with partner Finance Now with changeover imminent. This will strengthen the company’s access to funds and improve cost of capital.”
Automotive retail
The report reveals 2 Cheap Cars grew its market share for the 2023 financial year to 4.5 per cent, up from 4.4 per cent in the previous 12-month period.
“Margin was deliberately prioritised over volume as management refocused the sales strategy on margin expansion,” says NZAI.
“2 Cheap Cars continues to be well-positioned to meet the increasing demand for electric and hybrid vehicles (EV/HEVs). In FY23, the number of EV/HEVs sold as a proportion of total vehicle sales increased to 41 per cent, up four per cent on last year.”
It notes online vehicle sales lifted to 17 per cent of total sales and plans are in place to develop its website in an effort to increase online sales and finance attachment.
NZAI continues that the government’s clean car regime has constrained supply and increased the cost of used vehicles into New Zealand across the industry.
“2 Cheap Cars has a reliable source of used cars from Japan and has increased prices to offset the cost pressure, consequently further supporting the company’s strategic focus on margin expansion.
“Pricing and promotional activity has been optimised and the business has seen an uplift in margins in Q4, resulting in enhanced profitability.”
It is also using additional shipping suppliers to help overcome shipping capacity constraints affecting the industry.
NZ Motor Finance
NZAI explains the board has decided to focus on the core vehicle retailing business and to act as a finance agent.
“As a result, the NZ Motor Finance loan book will remain in run-down mode with the business collecting the loan receivables and recouping investment.”
NZ Motor Finance made a loss of $160,000 for the year, due to no new lending taking place since June 2023 and reversing a fair value gain generated through previous years’ lending.
The loan book reduced from $6.8m at March 31, 2022, to $3.9m at the end of March this year.
Looking ahead
Describing its foundations as having been reset, the company says it now focused on a more profitable vehicle retail business, alongside stronger lucrative finance and insurance penetration rates.
“2 Cheap Cars has a very clear value proposition and is seeing good demand for vehicles and finance and insurance driven by immigration, the government’s clean car regime, and the tightening economic environment.
“The vehicles sold by 2 Cheap Cars fulfil a basic and essential need. Therefore, despite the economic headwinds, the market segment is expected to remain buoyant.”
NZAI’s priorities to improve profitability include:
• Gross margin expansion – Margin delivery will take priority over market share.
• Supply chain – Focusing on a quality first approach, navigating shipping risks and progressing insourcing some compliance for cost and control upsides.
• F&I – Finance and insurance acceleration plan is under way, providing an incremental and highly profitable stream.
• Three-year strategic property plan – focusing on retail locations where the 2 Cheap Cars scale model works, providing opportunities for profitable growth.
• Increase in NPAT – Assuming favourable supply and trading conditions, NPAT expected to double to between $3.8m and $4.2m by concentrating on gross margin expansion, prudent cost management and increasing direct control of value chain.
Millward adds the last-quarter results, in particular, have been encouraging. “In the last three months to April 2023, the business has seen markedly improved financial performance through gross margin expansion.
“The company is now in a good position to leverage its strengths, realise its considerable potential and grow shareholder value.”
