GB Auto: 1Q21 – Strengthening of purchasing power boosts A&AR despite low seasonality

  • Healthy revenue growth despite low seasonality of the first quarter
  • Solid profitability of A&AR segment supports the company
  • Continuous improvement expected heading into 2021

Healthy revenue growth despite low seasonality of the first quarter

Revenues for 1Q21 amounted to EGP6.828 billion (up 15.9% YoY but down 5.2% QoQ); slightly higher than our expectations of EGP6.53 billion. The YoY increase came on the back of recovering market conditions across AUTO’s lines of businesses; sequential decline came due to seasonality associated with the first quarter of the year.

  • Revenues for 1Q21 from the Auto & Auto-related (A&AR) division came in at EGP5.451 billion (up 14.9% YoY but down 0.9% QoQ) due to increasing demand as consumers adapted to pandemic restrictions. Sequentially, revenues of A&AR division were flat despite the seasonality of the first quarter. 

  • Passenger Cars (PC) LoB revenues amounted to EGP2.764 billion (up 67.4% YoY but down 0.6% QoQ) on the back of 53% YoY increase in sales volume and 9.4% YoY increase in average selling price. Revenues of PC were flat reflecting a positive performance taking into consideration the slow seasonality of the beginning of the year. This came on the back of strengthening consumer purchasing power and growing demand for PC.

  • Likewise, two and three-wheelers (2&3W) division revenues increased by 41.3% YoY but down 0.9% QoQ to EGP935 million on the back of strong demand with sales volume increasing by 36.8% YoY. On QoQ basis, revenues were flat QoQ despite seasonality. On the regional front, revenues declined by 57.5% YoY and 22.0% QoQ to EGP635 million reflecting unfavorable economic conditions in Iraq.

  • Commercial vehicles and construction equipment revenues dropped by 14.8% YoY but increased by 95.9% QoQ to EGP225 million. The annual drop came on the back of pandemic effect on the tourism and education sectors resulting in a decline in bus volumes in 1Q21. Sequential recovery came on the back of growing demand for trucks and construction equipment which is driven by the growth in national infrastructure projects across Egypt. 

  • Tires revenues increased by 18.8% YoY and 1.0% QoQ to EGP283 million due to stable demand and solid performance from AUTO especially after launching the Goodyear brand. 

  • After-Sales LoB revenues declined by 3.2% QoQ but up 0.7% YoY to EGP294 million.

  • Revenues from the financing business were up 21.6% YoY but down 15.4% QoQ to EGP1.724 billion. The annual increase was driven by recovering market conditions which supported portfolio growth. NPLs increased in 1Q21 to 2.66% reflecting the delayed recognition of dues following the CBE’s declaration of a six-month moratorium on repayments owed to lenders.

Solid profitability of A&AR segment supports the company

Attributable net income for the quarter amounted to EGP299 million (up 116% YoY and 3.9% QoQ); higher than our expectations of EGP276 million. NPM amounted to 4.4% (up +2.0pps YoY and +0.4pps QoQ). This came on the back of operational improvements, cost optimization efforts, and reduced interest cost. 

  • 1Q21 automotive GPM stood at 13.5% (+0.8pps YoY but -0.2pps QoQ) with gross profit of EGP736 million (up 22.4% YoY but down 2.1% QoQ).

  • A&AR had efficient working capital management as working capital increased by 3.7% QoQ reflecting healthy financials. The cash conversion cycle for the quarter was 64 days which is almost flat compared to the last quarter (62 days) and less than that of 1Q20 (73 days).

  • Net debt increased by 8% to EGP5.4 billion on the back of increased inventory and accounts receivables during the quarter. However, the company intends to reduce the debt levels throughout the year. Consequently, Net Debt/Equity recorded 1.7x compared to 1.5x in 4Q20 but Net Debt/EBITDA decreased to 3.2x compared to 3.4x last quarter.

  • Net interest expense for the A&AR segment declined by 37.1% YoY and 1.9% QoQ to EGP161 million due to  favorable interest rate environment which supported A&AR profitability.

  • Financing business bottom-line amounted to EGP121 million, down 15.8% YoY and 43.2% QoQ. NPM recorded 7.0% (-3.1pps YoY and -3.4pps QoQ). This was because GB Capital recognized shared costs in 1Q21 that were historically booked under the A&AR segment. Also, the results of GB Capital were further muted QoQ because of two sizeable securitization transactions which boosted profitability in 4Q20. 

  • GB Capital maintained a healthy loan portfolio, which increased by 27% YoY and 9% QoQ and reached EGP12.66 billion in 1Q21. On the other hand, ROE dropped to 17.6% in 1Q21 compared to 26.9% in 4Q20.

  • Net interest margin increased to 17.9% in 1Q21 compared to 17.6% in 4Q20 and 18.0% in 1Q20.

  • NPLs stood at 2.66% in the quarter compared to 2.48% in 4Q20 and 1.50% in 1Q20 due to 1) accumulation of delayed loan payments following the CBE’s six-month grace period on loans, 2) a portion of clients unable to make timely settlements which are expected to be recovered in the short-term, 3) a decrease in receivables following the conclusion of two sizeable securitizations in 4Q20.

  • GB Capital recorded provisions of EGP52.4 million which were up 62.2% YoY but down 13.8% QoQ. Provisions coverage ratio decreased to 145% in 1Q21 compared to 153% in 4Q20.

Continuous improvement expected heading into 2021

Management expects a continuous improvement in the automotive division as demand normalizes for PC with consumers adapting to current challenges. AUTO also expects to capitalize on the government’s engine replacement program. Moreover, the effect of the global semiconductor shortage is expected to be solved by the end of 2021. Management also expects continuous strong performance in the two and three-wheelers segment supported by its price positioning strategies. Commercial vehicles and construction LoB is recovering at a slower pace due to the effect of covid-19 on education and tourism sectors; however, a healthy pipeline of national infrastructure projects is expected to support the growth of this LoB. Management expects total market of the passenger car market to grow by 10% YoY in 2021. AUTO will focus on increasing its market share and expects to sell at least 20% units in 2021 (around 36k units) more than the 30k units sold in 2020. 

Concerning GB's capital outlook for 2021, AUTO expects at least at 25% growth in the portfolio, maintaining healthy loan quality.

AUTO is trading at a 2021e P/E 0f 3.3x and EV/EBITDA of 3.7x.

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