S. Shlomo Holdings published its second-quarter report. As at Carasso Motors yesterday, the story is in the balance sheet rather than the income statement.
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The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 1,756 | |
| Gross profit | 316 | 18.0% |
| Operating profit | 197 | 11.2% |
| Pre-tax profit | 138 | 7.9% |
| Net profit | 103 | 5.9% |
| Attributable to shareholders | 92 | |
| Non-controlling interests | 11 | |
| Balance sheet total | 13,923 | |
| Shareholders' equity | 3,039 |
The Balance Sheet: 7.9 Times Turnover
NIS 13,923 million of assets on quarterly revenue of NIS 1,756 million.
And that is the ratio that defines the kind of business.
A company that only sells does not carry a balance sheet like this. Inventory, receivables and premises - and that is roughly all.
A balance sheet 4.6 times equity points to activity that holds assets over time: a leased vehicle fleet. A leasing company buys the vehicles, records them as assets, funds them with debt, and collects lease payments over years.
And that also explains the 18.0% gross margin. In leasing, "cost of sales" largely comprises depreciation on the fleet - an accounting charge rather than cash.
The practical meaning: at a company like this, profit is sensitive to two things that are not sales: the cost of the debt funding the fleet, and used-vehicle prices - because they determine what the fleet is worth at the end of the contract, and therefore how much depreciation is right to record.
And that is exactly the picture we saw yesterday at Carasso Motors, where the balance sheet was 5.2 times equity.
Financing: 29.9% of Operating Profit
From NIS 197 million of operating profit, NIS 138 million was left before tax. NIS 59 million was taken out.
That is a relatively moderate share - lower than Carasso Motors (43.6%) and than Electra Consumer (59.6%) - which is surprising given that leverage here is similar.
The explanation lies not in the balance sheet but in the numerator: Shlomo Holdings' operating profit is large relative to revenue - 11.2%, against 5.7% at Carasso. And when the numerator is large, the same interest charge is a smaller percentage of it.
And that is a point that recurred several times this week: the ratio of financing to operating profit does not follow from leverage alone. It follows from both - from the size of the debt and from the size of the profit.
Margin Survival: 62%
| Gross margin | 18.0% |
| Operating margin | 11.2% |
| Survival | about 62% |
62% is a relatively high figure, and it is consistent with a leasing company's structure: head office costs are small relative to the fleet. There is no wide branch network and no headcount-heavy sales operation.
Tax and Allocation
NIS 138 million before tax and NIS 103 million after - that is, tax of NIS 35 million, an effective rate of 25.4%.
Slightly above Israel's corporate rate.
And of net profit, NIS 11 million was allocated to non-controlling interests - about 10.7% - and NIS 92 million to the company's shareholders.
Return on equity for the quarter: NIS 92 million on equity of NIS 3,039 million, about 3.0%.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is another example of the balance sheet telling you more about the kind of business than the income statement does.
"Revenue of NIS 1.76 billion and net profit of NIS 103 million" could be said of many companies. What distinguishes this one is that behind that turnover stand NIS 13.9 billion of assets - and that already defines both the source of the profit and the source of the risk.
And the point I hold is that at a leasing company, two accounting judgements determine a substantial part of profit: the depreciation rate on the fleet, and the assumption about its value at contract end. Both are estimates, and both feed directly into cost of sales.
So I read accounts like these with one extra question: what is happening to used-vehicle prices. When they rise, depreciation recorded in the past proves conservative and profit tends to improve; when they fall, the reverse. And that is an entirely external variable.
And what I would look for in the full accounts is the split between leasing, vehicle sales, property and insurance - a branched group presents one line, and behind it sit businesses with entirely different cyclicality.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
