Earnings Report /

GB Auto: 1Q22 – Sequential performance weakened by seasonality; FX losses hit bottom-line

  • Slow and steady wins the race; Cherry supports PC volumes; After-Sales and Regional segments counterbalance weakness

  • Bottom-line shrinks by FX losses despite deleveraging; Capital maintains healthy portfolio with a solid interest margin

  • Cautiously outlook on auto segment; GB Capital has a bright future

Slow and steady wins the race; Cherry supports PC volumes; After-Sales and Regional segments counterbalance weakness 

Consolidated revenues for 1Q22 amounted to EGP7,842 mn, compared to EGP6,828 mn in 1Q21, showing a YoY rise of 14.9%, and compared to EGP9,047 mn in 4Q21, with a QoQ decline of 13.3%. The annual recovery was backed up by recovering market conditions, in January and February, and healthier consumer demand across all segments compared to 1Q21, as well as higher prices applied during the quarter. The sequential drop was a matter of seasonality, as 4Q21 was one of the highest performing quarters witnessed by the company.

Revenues from the Auto & Auto-Related (A&AR) division came in at EGP6,122 mn, compared to EGP5,451 mn in 1Q21, rising by 12.3% YoY, and compared to EGP7,162 mn in 4Q21, dropping by 14.5% QoQ.

  • Passenger cars’ sales recorded EGP2,961 mn, a YoY rise of 7.1%, while dropping by 22.6% QoQ. Despite the current market conditions of disrupted supply chain, shortages in main production materials, slow-down in imports, and heightened prices, volumes sold for the quarter was able to overcome that of 1Q21 by 12.9%, while the whole market sales dropped by 7.9% YoY. AUTO gained 3.6 ppts market share to reach 19.5% in 1Q22, versus 15.9% in 1Q21. However, the sequential front was unfortunate for both the whole market and AUTO, where the company's market share dropped from 22.1% in 4Q21 to the current 19.5%. Total Sales volume dropped sequentially by 19.8%, while the whole market volumes dropped by 9.3% QoQ. The company declared earlier in the quarter a rise in prices on certain models, yet the ASP was down YoY by 5.1%. and 3.5% QoQ, showing that consumers directed their purchases to models that did not witness a price increase or towards brands that are relatively cheap compared to others. Cherry market share reached 10.5% in 1Q22, versus 4.4% in 1Q21 and 8.5% in 4Q21. Hyundai market share dropped to 7.8% in 1Q21, compared to 11.5% in 1Q21 and 9.3% in 4Q21.

  • The Two & Three Wheelers LoB performance was weak as the company phased out their three-wheelers inventory. Revenues for the quarter amounted to a minimal EGP628 mn (-32.9% YoY, -38.6% QoQ). Sales volumes dropped by 33.7% YoY and 37.1% QoQ to reach 22,852 units. The company mentioned earlier that they are in talks with the government to find a substitute for the 3-wheelers, yet nothing is confirmed nor declared yet.

  • Commercial vehicles sales recorded EGP326 mn for the quarter, climbing by a solid 44.8% YoY on the back of 11.6% YoY expansion volumes due to truck sales, supported by the growing pipeline of national infrastructure projects, yet dropping by 19.3% QoQ on the impact of the Russian-Ukrainian war impact on tourism which affected bus sales. As long as tourism revenues remain weak, the commercial vehicles LoB’s growth is expected to be hindered.

  • The after-sales services LoB came in the green as it recorded revenues of EGP379 mn, showing a YoY growth of 28.9% and 4.1% QoQ as consumers face challenges in purchasing new vehicles and focus on maintaining their existing vehicles. In light of anticipated shortages and delays in vehicle availability, the after-sales service LoB is expected to continue improving.

  • Tires LoB revenues amounted to EGP446 mn, shifting upwards by 57.9% YoY and 6.2% QoQ on the back of healthy market demand for the company’s brands portfolio.

  • Regional LoB came in neon green, growing by 62.5% YoY and 27.8% QoQ, to reach EGP1,031 mn. Regional PC volumes increased by 52.6% YoY and 32.6% QoQ, pushing revenues upwards by 81.3% YoY and 53.4% QoQ. 2&3 wheelers revenues were up 54.4% YoY and 14.2% QoQ. The performance is partially driven by a low base effect in 1Q21 caused by the devaluation of the Iraqi Dinar. MG is currently the leading Chinese brand in Iraq with an 8% market share and ranked third in the market.

Revenues from the financing business recorded EGP1,987 mn, inching upwards by 15.2% YoY and downwards by 14.2% QoQ. The sequential drop was mainly driven by the seasonality factor. NPL/Loan portfolio climbed up to 2.54% in 1Q22, compared to 2.02% in 4Q21 and 2.48% in 1Q21. This rise is attributable to the current challenging economic conditions affecting the market.

Bottom-line shrinks by FX losses despite deleveraging; GB Capital maintains a healthy portfolio with a solid net interest margin

Consolidated attributable net profit for the quarter amounted to EGP229 mn, compared to EGP299 mn in 1Q21 and EGP472 mn in 4Q21 (-23.2% YoY, -51.4% QoQ).  NPM slumped from 4.4% in 1Q21 and 5.2% in 4Q21 to 2.9% in 1Q22 (-1.5pps YoY, -2.3pps QoQ). Bottom-line was pressured sharply by FX losses of EGP211.2 mn compared to FX gains of EGP8 mn in 1Q21 and FX losses of a minimal EGP3.5 mn in 4Q21. 

The decline of financing expenses by 13.6% YoY and 0.6% QoQ was not enough to compensate the FX effect on bottom-line. Excluding FX losses from bottom-line, net income could have recorded EGP441 mn (+47.4% YoY, -6.7% QoQ). 

  • 1Q22 bottom-line for the automotive business came in at EGP790 mn (+343.7% YoY, +285.5% QoQ) after receiving a dividends income in 1Q22 from GB capital in the form of bonus shares at a value of EGP681.9 mn (76% of A&AR EBT for 1Q22). NPM hit 12.9%, versus 3.3% in 1Q21 and 2.9% in 4Q21. Excluding the dividends income from the bottom line, net income could have recorded EGP108 mn, (-39.4% YoY, -47.3% QoQ). If FX losses were excluded along with dividends, net income would have recorded EGP306 mn (+72% YoY, + 49.4% QoQ).

  • 1Q21 automotive gross profit recorded EGP906 mn (+23.2% YoY, -6.5% QoQ), leading to a GPM of 14.8% (+1.3% YoY and QoQ). Such a rise in GPM was driven by higher prices throughout the quarter, which is the company’s tool to maintain margins as they face disruptions in supply chains and heightened costs by the EGP devaluation (2Q22).

  • A&AR working capital climbed by 22.9% YoY and 15.3% QoQ. The cash conversion cycle for the quarter recorded 64 days, versus 47 days in 4Q21 and 64 days in 1Q21. This rise was mainly due to an increase in inventory days to 95 days in 1Q22, compared to 69 days in 1Q21 and 58 days in 4Q21, in anticipation of increased shipping costs, further supply shortages and potentially further weakness in the Egyptian pound.

  • Net debt remained nearly unchanged QoQ at EGP4,829 mn, yet dropped by 6.9% YoY, despite the rise in inventory as management intends to reduce debt levels moving forward.

  •  The financing business bottom-line amounted to EGP122 mn in 1Q22 (+0.8% YoY, -54.5% QoQ) due to seasonality in 1Q22 as well as the securitization issuance of EGP4.3 bn occurring in 4Q21. NPM reached 6.1% in 1Q22, versus 7% in 1Q21 and 11.6% in 4Q21.

  • GB Capital maintained a healthy loan portfolio of EGP15,724 mn, compared to EGP14,430 mn in FY21 and EGP12,661 mn in 1Q21 (+24% YoY, +9.7% QoQ).

  • ROAE came in at a weak 14%, compared to 22.3% in FY21 and 17.6% in 1Q21.

  • Net interest margin recorded a record high of 21.9%m compared to 18.6% in FY21 and 17.9% in 1Q21.

  • Coverage ratio dropped to 84% from a previous 105% in FY21 and 121% in 1Q21.

  • Provisions recorded EGP38 mn, compared to EGP52 mn in 1Q21 and a provision reversal of EGP75 mn in 4Q21.

Cautiously outlook on auto segment; GB Capital has a bright future

1Q22 performance came in positive, taking into consideration the seasonality factor, and the challenges faced by the company when it comes to a slowdown in imports, putting a halt to the production process, and the EGP devaluation pressuring the bottom-line through FX losses.

Moving through FY22, we believe 2Q22 might be the weakest, after which slow and gradual recovery might happen due to seasonality and depending on the pace of recovery in market conditions (like the pace of imports recovery and production returning to normal levels, maybe by 4Q22). Prices are expected to incline noticeably to reflect cost hikes and to maintain margins. Cherry forms a supportive front as a relatively cheap brand, supporting volumes throughout the period of inflation.

GB capital portfolio is expected to expand further as the current economic conditions could easily lead to higher need for financing, and with the hikes in interest rates, revenues, in turn, are expected to grow, allowing the company to maintain healthy profitability.

AUTO is currently trading at a FY22 P/E of 3.1x and an EV/EBITDA of 6.4x