The Finance Ghost: Zeda Uber Alles

Firstly, the name is Zeda. Not Zeder. That’s a completely different company. Secondly, it’s worth remembering the name because Zeda is doing good things.

Even if the name Zeda is foreign to you, I’m sure that you’ve heard of Avis, which happens to be the major brand operated by Zeda. I’m also sure that you’ve heard of Barloworld, the large conglomerate that incubated, operated and finally unbundled Zeda to shareholders. Conglomerates aren’t loved by the market, as investors prefer to be able to take more precise views on what they are exposed to. Barloworld’s management does a good job of listening to shareholders, so Zeda was duly set free for investors to consider.

The unbundling was completed in December 2022, so this is a good opportunity to look back on the first year of Zeda’s life as a separately listed group. It’s been a bumpy ride to say the least, with the share price plummeting in mid-2023 as investors panicked about the amount of debt on the balance sheet and general operating conditions in South Africa.

Now, both of those things were reason for concern at the time, even if Zeda has subsequently managed to do a fantastic job of navigating the debt. But the reason why Zeda’s share price has returned over 40% in the past six months is because the valuation multiple had become so ridiculously low that it was almost impossible for investors not to do well from those levels. Remember, Zeda is a mobility business, not a mining group dependent on a single commodity. Profits don’t just melt away overnight.

Uber – not such a competitor anymore?

There was a time when Uber was hammering the car rental businesses. In fact, it was so exciting and reliable that I knew people who sold their cars in favour of just Ubering around everywhere, as they had done the maths and they figured out that it was cheaper than car ownership.

Then, along came a pandemic. I’m not sure when last you used Uber, but the quality of the cars is about as good as the quality of the roads in Joburg. The seats are torn, the suspension feels dicey and the driver absolutely refuses to put on the aircon unless you’re paying for a more expensive type of Uber.

On top of all this, getting a trip these days is tougher than guessing the direction of the gold price. Long gone are the days when an Uber driver would happily drive you three blocks for R30. Today, Uber is an unreliable irritation more than a serious mobility solution. 

Long story short: the car rental market is alive and well. Relying on Ubers is risky and many South Africans have come to that conclusion. So have tourists, particularly as South Africa is already seen as a high-risk place to travel. With strong demand for inbound travel as global guests venture here to enjoy world-class food and experiences at prices that are ridiculously cheap by international standards, the car rental market is making hay while the post-COVID sun is shining.

And boy, is it shining. Whether you read updates from City Lodge, Southern Sun or even Bidvest, you’ll find a consistent narrative that the bright spot right now is travel and hospitality. The rand is weak and our global appeal is strong.

In the year ended September 2023, Zeda’s car rental business grew revenue by 12%. Inbound travel was up by a ridiculous 98%, admittedly off a subdued base. Corporate travel was up 48%, suggesting that Zeda is also well-positioned for a world in which business is being done with a handshake once more, not a conversation starting with: “Hey, you’re on mute. No, you’re still on mute. Was that your cat’s tail?!?”

Lessons were learnt in COVID

Sometimes, it takes a crisis to change behaviour. Although it is true that nobody could make a successful argument that South Africa was enjoying a bull market when the pandemic came along, it is also true that corporates were bloated with expenses and inefficiencies. As absolute chaos ensued, they were forced to examine every possible expense and find ways to survive.

It was a painful experience. It was also the kind of experience that creates long-term value, as corporates got rather good at figuring out what they can and can’t live without. For the car rental businesses, they were handed a get-out-of-jail card by low interest rates, as they could sell off their fleets into a used car market with increasing prices thanks to demand outstripping supply of vehicles.
Although we now find ourselves in a normalised used car market, the good news is that rental fleets are now at appropriate sizes. Zeda is responding to demand, as the fleet increased by 17% in the year ended September to over 20,000 units. The utilisation rate is at a healthy 74% though, so things are working well.

For further evidence, the EBITDA margin increased from 27% to 28% and operating profit margin (before capital items) came in at 13%.

Don’t ignore the leasing business

Zeda is enjoying excellent demand for its leasing products, particularly heavy commercial vehicles. There is increasing road freight activity in South Africa, possibly assisted by the well-documented failings of Transnet Fright Rail. I mean, Transnet Freight Rail.

Was that even a typo?

Anyway, Zeda is the happy winner in an infrastructure situation that isn’t good for South Africa. Revenue in the leasing business grew by 13% and EBITDA was up 19%. EBITDA margin increased from 56% to 59%. Operating profit margin (before capital items) increased substantially from 21% to 27%.

Putting it all together

In Zeda, we have a group achieving return on equity of 36.7%, which puts most business models to shame. Headline earnings per share (HEPS) just grew by 17.3%, so there’s no shortage of growth here. Margins have moved in the right direction. 

Perhaps the most important point is that the unbundling debt has been settled in full, two months ahead of schedule. This debt was the cause of concern for many investors. The balance sheet is looking a lot better now, thanks to a year of strong cash generation and a focus on sorting out the debt rather than paying dividends to investors.

In the 2024 financial year, Zeda is targeting a payout ratio of 20% to 30% of net profit after tax. This will put the company on the radar of investors who require dividends, which could catalyse more growth in the share price.
With HEPS of 381 cents and a share price of R13, Zeda is on a Price/Earnings multiple of 3.4x. Put differently, the earnings yield is 29%.

I’m tempted to wait for a pull-back after the recent rally. I’m also conscious that at this valuation multiple, I might be waiting forever for that pull-back.

As always, single-stock position sizes should be managed carefully. It’s never a good idea to bet a large percentage of your portfolio on a single stock. As single stock opportunities go though, my view is that Zeda makes a compelling case for itself. 

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