Recession eats into profits

The Colonial Motor Company has announced an after-tax trading profit of $17.88 million for 2023/24 – down by 41 per cent year on year – while revenue from ordinary activities came in at $1.01m for a 1.6 per cent rise.

Chairman Ash Waugh notes there have been deteriorating market conditions in New Zealand over the past two years.

“This has resulted in an increasingly challenging trading environment and the deterioration is evident in this year’s result,” he says.

“It was still a year of two halves. The first half produced a respectable result in a weakening market, albeit with high inventory carrying costs. The second half bore the full brunt of recession with softer light-vehicle demand, continuing high interest rates and an oversupplied market across the industry. 

“New and used-vehicle margins have been squeezed, reducing dealer profitability. The dealer response has been to review cost structures while remaining focused on delivering positive bottom-line results.”

For context, Waugh, pictured, points out the June calendar year-to-date new-vehicle market was down by 26.2 per cent on the prior year. 

Colonial’s heavy-truck business continued to perform well as customers replaced their existing vehicles with long-awaited new units. Meeting that demand came with adverse imposts on efficiency, productivity and inventory carrying costs. 

“We have seen no such replacement policy in our tractor operations, which are heavily impacted by the negative sentiment in the agricultural sector,” says Waugh.

“We remain confident the ongoing investment in the JAC Motors brand will bear fruit in future years. The team continues to work through vehicle compliance, on-road testing and the set-up of a sales and service network, all of which incur the normal challenges associated with establishing a new brand.”

In relation to property, the company has trimmed facility investments in response to rising building costs and the downturn in the vehicle market. It has progressed the Fagan Motors dealership rebuild in Masterton, an extension to Dunedin City’s parts warehouse, and refreshed facilities in south Auckland and Christchurch to represent JAC. 

In addition, the consenting process is well under way for a new Southpac truck facility on land purchased in Palmerston North. 

Waugh reconfirms that a one-off non-cash deferred tax adjustment of $12.7m was made on June 30. 

This was in response to the government’s decision to remove the depreciation allowance on commercial buildings with an estimated life of 50 years or more. The impact will see a minor increase in the tax payable over a period of decades. 

“While the adjustment reduced the profit for the year, it had no effect on the determination of the final dividend,” says Waugh. “It also did not affect the 2024 financial year’s cash flows, income-tax liability, operating activities or value of the company’s property portfolio.” 

He considers that, during this new financial year, the state of the New Zealand economy will dominate the direction of retail markets. 

“Demand for light vehicles is likely to remain subdued for as long as interest rates remain relatively high. Oversupply will continue to be a challenge the industry has to manage hand in hand with a growing number of new brand entrants competing for a declining market. 

“These market forces will impact margins across our businesses, particularly in the new light-vehicle fleet. Despite this, the Ranger and Everest are expected to maintain their momentum, providing a degree of support to our Ford dealerships, although they too are not immune to market conditions.”

Waugh notes one positive development has been the government’s decision to align New Zealand and Australian emissions standards. “This will unify New Zealand’s pattern of vehicle supply and demand across the trans-Tasman region, so a rational change that has been welcomed by the industry.” 

Colonial’s directors have declared a fully imputed dividend of 20 cents per share to be paid on October 7 with a record date of September 27. This will take the total dividend for the year to 35 cents, 64 per cent of trading profit after tax.

The company’s annual general meeting is being held on November 4 at The Harbourside function venue in Taranaki Street, Wellington, while its annual report will be published in late September.