VALUE CHECK: Marshalls eyes passenger car market - Daily Nation

VALUE CHECK: Marshalls eyes passenger car market

Tuesday January 18 2005

By AZIM NATHOO

Marshalls (EA) Limited was incorporated in 1947 and listed on the NSE in 1954. The principal activity is to sell and service motor vehicles. 

It has Kenyan distributorships for Peugeot (France), KIA (Korea) and Tata (India) models. In addition, the company has a 50 per cent shareholding in Associated Vehicles Assemblers Limited (AVA). 

In the last three years, on a year-to-year basis, turnover declined by 15 per cent and earnings declined by nine per cent. Cumulative sales increased by 36 per cent and earnings increased by 34 per cent, posting Sh1.27 billion and Sh1.54 per share, respectively in 2004. The return on equity was almost 16 per cent (six per cent came from operations and 10 per cent from borrowed funds) in 2004 compared to 11 per cent in 2003.

The outstanding shares were 14.39 million, of which the ten largest shareholders controlled just over 88 percent and public float was 1.6 million shares. 

The last dividend the company paid was in 1998. The market is estimating 12 times multiple to forward earnings, that is, the recent stock price, (Sh18.50), divided by earnings (Sh1.55) on per-share basis. 

In the last three years, the company has seen its sales decline by about 38 per cent, but has had an improvement in profitability. Better earnings have been attributed to cost-cutting measures and operation efficiency, achieved through investment in technology infrastructure. 

During the year, the company acquired the distributorship of Kia Motors of Korea and continued to invest in the development of AVA Limited. 

The company’s future growth in earnings will be affected by high crude prices, interest rates, weak shilling and consumer confidence. In addition, the growth in the industry is being affected by cheap imports mainly arising from duty evasions. 

Further, used vehicles prices are posed to decline once the new common external tariff is implemented by the new Customs Union.

However, there are signs that the new motor vehicle market is recovering. The year 2004 saw the motor vehicle market increase by 16 percent to 7,168 units. The commercial vehicle segment continued to recover, but the passenger saloon car market declined by 5.2 percent.

With the strength of the Euro and declining Peugeot volumes, Marshalls has embarked on a programme to improve earnings by expanding in its current market segment and identifying new markets. 

For its current market, it will be introducing in the Tata one-ton pick-up in both single and double cabin version as well as four-wheel drive. In addition, with the acquisition of the Kia distributorship, it will introduce a complete range from the basic saloons to luxury four-wheel drives. The company’s strategy is to increase its market in the passenger vehicle segment and enter the four-wheel drive market.

Looking beyond the horizon, I expect earnings to be maintained by the medium and large passenger bus segment, strong cost controls and operation efficiency. 

Growth will come from luxury four-wheel drives and one ton pick-up. There will be controlled growth in the passenger segment, since it has a competitive advantage over other distributorships. 

That is, the Kia and Tata models are less expensive than their competitors, thus enabling the company to expand its market share. This growth will be offset by the end of the 504 range. I do expect strong performance from the AVA division.

For the purposes of valuation, I will estimate the intrinsic value by expected rate of return (ERR), discounted retained earnings (DRE), capital asset pricing model (CAPM) and Aswath Damodaran valuation technique.

Expected rate of return valuation model looks like this:

The value of the stock price today depends on next year’s forecasted earnings divided by the difference between the required rate of return and the expected rate of return which is the risk adjusted discount rate. 

Forecasted earnings in 2004 are Sh1.74, which is a growth of 12 per cent. I obtain an implied current share price of Sh19 when we apply a 19 per cent required rate of return and 10 per cent minimum expected rate of return. The current market price reflects an expected rate of return of 18.4 per cent.

The discounted retained earnings analysis works to determine what a company’s future earnings are worth today. This model assumes that the future growth rates are attainable, and that the retained earnings will be reinvested wisely to achieve an acceptable rate of return. 

When I apply to this model a growth rate of 12 per cent in earnings over the next five years and discount it with the risk free rate of 7.5 per cent and add a residual value in year six, this gives a value of Sh34.

The capital asset pricing model (CAPM) accounts for risk and the model is risk adjusted discount rate = risk free rate + beta (benchmark rate - risk free rate), where beta measures the stock’s volatility relative to an index.

Applying an industry average beta of 1.01 plus a risk free rate of 7.5 per cent and a benchmark rate of 10 per cent, I get a risk-adjusted discount rate of 10 per cent. 

Applying growth rates of 12 percent on future earnings discounted at 10 per cent over the next 5 years, I obtain an implied present value of Sh24.

The Damodaran’s advanced valuation model cannot be applied since the company has a weak balance sheet. It has over Sh50 per share in debt.

Marshalls (EA) Limited was incorporated in 1947 and listed on the NSE in 1954. 

The principal activity is to sell and service motor vehicles. It has Kenyan distributorships for Peugeot (France), KIA (Korea) and Tata (India) models. In addition, the company has a 50 per cent shareholding in Associated Vehicles Assemblers Limited (AVA).

In the last three years, on a year-to-year basis, turnover declined by 15 per cent and earnings declined by nine per cent. Cumulative sales increased by 36 percent and earnings increased by 34 per cent, posting Sh1.27 billion and Sh1.54 per share, respectively in 2004. The return on equity was almost 16 per cent (six per cent came from operations and 10 per cent from borrowed funds) in 2004 compared to 11 per cent in 2003.

The outstanding shares were 14.39 million, of which the 10 largest shareholders controlled just over 88 per cent, and public float was 1.6 million shares. The last dividend the company paid was in 1998.

The market is estimating 12 times multiple to forward earnings, that is, the recent stock price, Sh18.50), divided by earnings (Sh1.55) on per-share basis. 

The discounted-retained earnings analysis works to determine what a company’s future earnings are worth today. This model assumes that the future growth rates are attainable, and that the retained earnings will be reinvested wisely to achieve an acceptable rate of return. When I apply to this model a growth rate of 12 per cent in earnings over the next five years, and discount it with the risk free rate of 7.5 per cent and add a residual value in year six, this gives a value of Sh34.

The capital asset pricing model (CAPM) accounts for risk and the model is risk adjusted discount rate = risk free rate + beta (benchmark rate - risk free rate), where beta measures the stock’s volatility relative to an index.

Applying an industry average beta of 1.01 plus a risk free rate of 7.5 per cent and a benchmark rate of 10 per cent, I get a risk-adjusted discount rate of 10 percent. Applying growth rates of 12 per cent on future earnings discounted at 10 per cent over the next five years, I obtain an implied present value of Sh24.

The Damodaran’s advanced valuation model cannot be applied, since the company has a weak balance sheet. It has over Sh50 per share in debt.


Azim Nathoo is an independent financial analyst. His approach to investing is capital preservation with long-term capital appreciation. It involves in-depth research and customized valuation models for each company studied.

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