Growth momentum put to a halt by Covid-19
GB Autos's 1Q20 consolidated revenue amounted to EGP5,889 million, up by 0.8% YoY but down -17.0% QoQ. Revenue from the automotive business came in at EGP4,744 million, recording both an annual (-4.1%) and sequential (-17.4%) drop on the back of volume contraction across all segments. According to AMIC, the Egyptian automotive market recorded a strong rebound in volumes prior to the pandemic outbreak in mid-March (+50% YoY increase to 52,931 vehicles) following depressed 2019 volumes. However, the challenging external environment caused by Covid-19 (including the closure of the traffic department, the slowdown in tourism and construction activity and shorter showroom hours) have crippled PC demand and further compounded the existing regulatory constraints that were pressuring some segments. Likewise, regional revenues in Iraq recorded a -5.7% YoY and -25.5% QoQ, reflecting lower volumes in Iraq as a result of the full lockdown enforced throughout March 2020.
Revenue from the financing business also saw a sequential contraction of -13.3% QoQ, on account of seasonal weakness and owing to the portfolio securitization of EGP1.2 billion executed in 4Q19. Despite the QoQ drop, financing topline recorded annual growth of +24.2% YoY reaching EGP1,417 million in 1Q20 supported by the progressive rate cuts over 2019 and the additional 300bps rate cut in March 2020 which helped stimulate demand. GB Capital’s strong performance comes on the back of solid results from factoring segment ‘Drive’ (+30.6% YoY), as well as the microfinance business ‘Mashroey’ (+16.1% YoY) and ‘Tasaheel’ (+70.9% YoY). The growth was driven by Egypt’s favorable interest rate environment and AUTO’s continued branch network expansions across Egypt which allowed the company to offer new products at attractive rates to customers.
Automotive business records narrower losses; Financing business keeps stable margins
For the 6th consecutive quarter, profitability from the financing arm kept the company’s consolidated bottom line in the green, recording a net profit of EGP138 million (+428% YoY and +311% QoQ) and NPM of 2.3% (+1.9pps YoY and +1.9pps QoQ).
1Q20 automotive GPM stood at 12.7% (+1.7pps YoY and +2.7pps QoQ) as a result of management’s strategic shift to focus on profitability in the Egyptian and Iraqi passenger car and 2&3 wheeler segments. Accordingly, the automotive business incurred a net loss of EGP5 million in 4Q19, versus a loss of EGP139 million in 4Q19 and a loss of EGP93 million in 3Q19. This improvement was supported by the better price mix mentioned earlier as well as a -27.3% YoY and -13.4% QoQ change in financing costs, in line with the company’s plan to deleverage its balance sheet. Since AUTO’s debt is a direct function of working capital, the decline in the net debt/EBITDA metric to 4.0x in 1Q20 from 8.9x in 4Q19 and 4.8x in 1Q19 largely reflects leaner working capital and cash conversion cycle.
Net income and NPM from the financing business came in at EGP144 million (+21.1% YoY but -20.6% QoQ) and 10.1% (-0.3pps YoY and -0.9pps QoQ) respectively. GB Capital maintained a healthy EGP10 billion loan portfolio in 1Q20 (+16.9% YoY and +9.9% QoQ) with non-performing loans standing at 1.50% (+0.3pps YoY and +0.1pps QoQ) of the portfolio. GB Capital's annualized NIM settled in at 18.0% in 1Q20 (+4.9pps YoY and +2.1pps QoQ), on the back of the recent rate cuts executed by the CBE. The company had previously reported that the recent regulations from the FRA and CBE, allowing debtors an extension of up to six months on loan repayments to banks and other financial institutions, have resulted in 31% of GB Lease and 25% of Drive's customers asking for extensions on their dues and a marginal amount of microfinance customers delaying their dues.
Turbulent times ahead despite signs of easing
Amidst the current levels of uncertainty at bay, and with April and May taking the full-effect of the current situation, we are expecting acute volume contraction during 2Q20. With that said, the company reported that they are beginning to witness increased traffic at their Egyptian showrooms, particularly with the reopening of the traffic department. Nevertheless, the more price-sensitive consumers are likely to delay new vehicle purchases until the current state economic volatility calms down.
Meanwhile, AUTO’s regional business has been action-packed even prior to the pandemic, following the company’s discontinuation of its Hyundai representation and subsequent partnership with SAIC Motor Middle East FZE to add the MG brand to its brand portfolio in Iraq. GB Auto will market, distribute and provide after-sales and warranty services for fully imported models produced by MG International, starting late 3Q20 or early 4Q20. Additionally, the Iraqi government has reportedly started gradually easing restrictions, following a complete lockdown in April, and hence the company expects to complete the liquidation of their remaining Hyundai inventory by the 3Q20.
On the business continuity front, management disclosed they have taken the following measures to ensure financial strength, which will be reflected on their financials starting 2Q20: 1) ensuring working capital is as lean as possible, while maintaining an inventory volume that is both appropriate to the current times and for demand recovery, 2) freezing all auto-related capex plans for the remainder of 2020 save for the minimum spending required for maintenance, 3) embarking on an aggressive cost-cutting program with full implementation starting April and 4) subscribing to the Central Bank’s six-month debt extension program which should cushion future stress on their bottom line.