‘Cocktail’ of challenges hit market

A mix of economic and regulatory uncertainty is threatening to hit profits at the Colonial Motor Company in the current financial year, according to its chairman Ashley Waugh.

His warning comes in an address presented to the company’s 105th annual general meeting after the business recorded trading profits after tax of $30.3 million and $33.3m in the past two years.

“Overall, the company is experiencing a mixed trading environment so far in this financial year and that is likely to carry through to the calendar year end,” says Waugh. 

“It will not be until well into the first quarter of 2024 that we will have a clearer understanding of the direction of travel for the current financial year. 

“It will be a real challenge to deliver a result at the level we have enjoyed for the past two years whilst the cocktail of headwinds and regulatory uncertainty continue.”

Waugh, pictured, notes the operating environment for the automotive sector continues to undergo change and those shifts were being felt at a dealership level. 

He adds the general business sentiment is that higher inflation will be here for longer and interest rates will remain elevated as a result, with Colonial also affected by these factors.

“There is not the [same] level of enquiry on light vehicles but we are not yet convinced the new vehicle market is heading in only one direction,” he adds. 

“There continues to be negative economic pressures that may see the weaker demand environment continue for a period. 

“We do know the new government has committed to repeal the clean car incentive and ute tax. That is materially delaying purchases of our popular ute and SUV product until those changes take effect, likely now into the second half of the current financial year.” 

He says Colonial’s record $33.3m profit in the 2022 financial year was always going to be a hard act to follow but it still managed to deliver its second-highest profit result in the next 12-month period.

This came despite a market where the “artificial stimulus” of the clean car discount had passed and been replaced by “negative tax imposts” affecting its strongest market segments.

“The trading profit after tax for the last financial year was $30.3m, down nine per cent on the prior year,” explains Waugh. 

“The passenger and light commercial markets were heavily impacted by disruption from the clean car rebate and ute tax announcements that softened enquiry. 

“During this time, we were fortunate to hold strong order banks for popular models, including the next-generation Ford Ranger and Everest. This was partnered by the continued solid demand for heavy trucks.”

He notes the trading profit after tax included a $2.5m write-down in property values and a further write-down of $2.5m taken through reserves. 

Market conditions 

Waugh says the market and trading environment during the 2023 financial year for new cars and light commercials was a “stop-start affair, driven by tax incentives that created short-term high demand, followed by the inevitable significant collapses in that demand”. 

The most recent example of this was June 2023 being the biggest new-vehicle sales month on record followed by the smallest July market. 

In the 12 months to the end of June 2023, the total light vehicle market was 9.5 per cent down on the prior year, at 105,889 units, which Waugh adds was still a reasonably healthy market. 

Colonial’s heavy truck business experienced solid trading, “although somewhat limited early on by international supply chain disruptions that saw truck deliveries delayed, in some instance by up to a year and more”. 

More recent relief from those supply chain constraints has seen an increasing commitment to truck inventory. 

Property 

Colonial’s redevelopments at Avon City Ford in Christchurch, Timaru Motors and Dunedin City Motors made significant progress in the 2023 financial year. 

“In these more constrained times, we believe it is prudent to trim our facility capital commitments as construction costs climb,” Waugh adds. 

“That said, we still have significant long-term projects on the books for a Ti Rakau Drive facility in Auckland and for the most recent land purchase at Palmerston North to support heavy vehicles in the region.”

The company also has commitments to redevelopments at Masterton and Waipukurau. 

Governance 

The build-up to the AGM on November 10 was dominated by the New Zealand Shareholders’ Association (NZSA) announcing it would vote against the four resolutions on the agenda over concerns about the company’s disclosures to investors. 

Waugh touched on this in his address, saying that reporting on risk management has been a feature of annual reports for many years. 

“The board understands the NZSA has its own agenda and preferences beyond what is required by the listing rules, regulations and legislation,” he adds. 

“The board has always been open to feedback and reviewed the NZSA report … In areas where we believe we can widen our disclosures and they are in the best interests of the company and our shareholders, this will be done.”