Earnings Report /
Egypt

GB Auto: 2Q22 – GB Capital steady as a rock; auto segment falters against a heavy storm

  • Passenger cars and 2&3 wheelers continue to suffer while the remaining LoBs soar; GB Capital running on a green track

  • Seasonality slumps A&AR's bottom line; Capital’s charged by trickling down of a healthy top line and cost optimization

  • Possible CKD portfolio to save volumes from sinking; GB Capital has a bright future; Maintain Overweight

Al Ahly Pharos Securities Brokerage
17 August 2022

Passenger cars and 2&3 wheelers continue to suffer while the remaining LoBs soar; GB Capital running on a green track

2Q22 consolidated revenues came in at EGP7,834 mn, nearly flat QoQ with a YoY rise of 7.8% from the previously recorded EGP7,269 mn in 2Q21. This performance is a result of strong demand on the company’s offerings and improved pricing strategies across the auto business segment. 1H22 revenues recorded EGP15,676 mn, compared to EGP14,097 mn reflecting a YoY rise of 11.2% driven by a solid 1Q22 and heightened YTD prices compared to 1H21.

  • Revenues for the Auto & Auto-Related (A&AR) business line recorded EGP5,824 during the quarter (+1.1% YoY, -4.9% QoQ). AUTO managed to achieve a YoY growth despite the steep decline in volumes across most segments backed by heightened selling prices. However, the sequential drop was driven by local and global developments including local import restrictions and currency devaluation.

  • Passenger car sales recorded EGP2,729 mn, dropping by 6.5% YoY and 7.8% QoQ as sales volume dropped by 6.5% YoY and 12.6% QoQ, reaching 9,474 units during 2Q22 as the market experiences a setback due to import restrictions with price hikes not enough to compensate the volume drop on revenues level. However, AUTO managed to maintain a healthy market share of 24.8% compared to 19.4% in 2Q21. Import restrictions on CBU units gave room for CKD units' volume growth, allowing Cherry to gain a large market share during 1H22 of 11.7%, compared to only 6.2% in 1H21. However, its nature of low-price points compared to other brands in AUTO’s portfolio didn’t support PC revenues enough to achieve sequential or annual growth. PC revenues for 1H22 recorded EGP5,690 mn, flat YoY with growth in volumes by 2.9% to reach 20,313 units while ASP dropped by 2.7% due to the revenue mix shifting towards lower price points.

  • Two & Three Wheelers LoB revenues dropped by a full 33.1% YoY and 7.3% QoQ during 2Q22 despite the rise in ASP by 25.6% YoY and 20.6% QoQ, yet the drop in volume by 46.8% YoY and 23.2% QoQ caused by importation ban on the three-wheelers and slowdown in LCs opening on the two-wheelers took a toll on the segment’s revenues. 1H22 revenues dropped by 33% YoY to reach EGP1,210 mn driven by the steep decline of 40.1% YoY in volumes.

  • Commercial Vehicles LoB continued with its growth for another quarter to achieve revenues of EGP389 mn (+110.6% YoY, +19.4% QoQ) despite a 7.1% QoQ contraction in volumes due to a positive revenue mix from increased sales of trailers and construction equipment in 2Q22. Meanwhile, bus sales continue to be affected by the Russian-Ukraine war’s impact on tourism. 1H22 sales soared by 74.4% YoY to reach EGP715 mn, driven by a 7.7% rise in volumes and a full 62% rise in ASP.

  • After-Sales LoB revenues reached EGP402.3 mn during 2Q22 (+31.9% YoY and 6.2% QoQ) as consumers continue facing challenges in purchasing new vehicles and focusing on maintaining their existing vehicles. 1H22 revenues recorded EGP781 mn, a YoY climb of 30.5%.

  • Tires LoB recorded revenues of EGP361 mn, a climb of 7% YoY yet dropping by 19.2% QoQ as the market faces shortages in tire supply and a slowdown in LCs. 1H22 revenues came in at EGP807 mn, a growth of 30.2% on the back of healthy market demand for the company’s portfolio of offered tires brands, along with the increase in prices.

  • Regional LoB continues its track of growth, achieving sales of EGP1,154 mn (+48.3% YoY, +11.9% QoQ) on the back of growing PC and 2&3 wheelers sales during the period. MG brand during the quarter reached a market share of 7.3%, ranking as third in the Iraqi market. 1H22 sales recorded EGP2,185 mn, a YoY hike of 54.7%.

GB Capital (Financing Businesses) recorded revenues of EGP2,358 mn (+27.2% YoY, +18.7% QoQ) reflecting strong performances across subsidiaries. On a semi-annual basis, revenues recorded EGP4,344 mn compared to EGP3,578 mn recorded in 1H21 reflecting a YoY growth of 21.4%. NPLs/Loan portfolio ratio decreased slightly to reach 2.48% in 2Q22 compared to 2.54% in 1Q22 and was down from 2.60% recorded in 1H21.

Seasonality slumps A&AR's bottom line; Capital’s income charged by trickling down of a healthy top line and cost optimization

Consolidated attributable net income for the quarter amounted to EGP490 mn, a remarkable incline of 31.3% YoY and 113.9% QoQ. The sequential hike was due to significant FX losses impacting the 1Q22 bottom line, while the annual rise was supported by the company’s operational efficiency initiatives as well as higher revenues trickling down to the bottom line, leading to a NPM of 6.3%, compared to 5.1% in 2Q21 and 2.9% in 1Q22. 1H22 attributable net income came in at EGP720 mn, compared to EGP672 mn in 1H21, showing a YoY growth of 7.1%, leading to a NPM of 4.6%, compared to 4.8% in 1H21.

  • The A&AR segment’s net income dropped by 7.6% YoY and 72.9% QoQ to record EGP214 mn. The sequential drop is due to a high base effect of a dividend income received in 1Q22. This led to a NPM of 3.7% compared to 4% in 2Q21 and 12.9% in 1Q22. 1H22 bottom line for A&AR segment came in at EGP1,004 mn compared to EGP410 mn recorded in 1H21 (+145.1% YoY) due to the one-off dividend income received in 1Q22 from GB Capital in the form of bonus shares, at EGP681.9. NPM reached 8.4% compared to 3.7% recorded in 1H21. Normalizing 1Q22 profits would have resulted in a bottom line of EGP108, leading the 2Q22 bottom line to be higher by 98.2% QoQ.

  • 2Q22 automotive gross profit recorded EGP942 mn (+19.3% YoY, +3.9% QoQ), leading to a GPM of 16.2% (+2.5pps YoY, +1.4pps QoQ). Such a rise in GPM was driven by higher prices throughout the quarter, which was the company’s tool to maintain margins as they face import restrictions, supply chain disruptions, and heightened costs by EGP devaluation. 1H22 gross profit came in at EGP1,848 mn, compared to EGP1,525 mn (+21.2% YoY), reflecting a GPM of 15.5% versus 13.6% in 1H21 (+1.9pps YoY).

  • A&AR working capital climbed by 15.6% YoY and 1% QoQ. The cash conversion cycle for the quarter recorded 71 days, versus 64 days in 1Q22 and 60 days in 2Q21. Inventory days dropped to 85 days during 2Q22 compared to 95 days in 1Q22, yet, remained above 71 days recorded in 2Q21.

  • Net debt witnessed a minor rise of 1% QoQ while dropping YoY by 9% to stay steady at the EGP5 bn mark.

  • The financing business bottom-line amounted to EGP277 mn (+92.8% YoY, +127.2% QoQ). 1H22 net profit recorded EGP399 mn, a climb of 50.8% YoY. Supported by trickling down of a healthy top line and shrinking costs as well as a minimal support from Tasaheel securitization occurring at the very end of the quarter, recording EGP0.3 mn in revenues. NPM for the quarter came in at 11.7%, versus 7.7% in 2Q21 and 6.1% in 1Q22. While 1H22 NPM recorded 9.2% versus 7.4% recorded in 1H21.

  • GB Capital continue in growing its loan portfolio to reach EGP16,105 mn by 1H22, compared to EGP15,724 mn recorded in 1Q22 and EGP13,842 mn in 1H21 (+2% QoQ, +16.3% YoY)

  • ROAE stood at 22.2% in 2Q22 compared to 14% in 1Q22 and 19% in 2Q21.

  • Net interest margin dropped to 18.5% in 2Q22 from 21.9% in 1Q22 due to the increase in the corridor rate and cost of funds.

  • Provisions recorded a reversal of EGP1 mn, compared to provisions of EGP32 mn in 2Q21 and EGP38 mn in 1Q22.

  • The coverage ratio dropped to 83% from a previous 84% in 1Q22 and 114% in 2Q21.

Possible CKD portfolio to save volumes from sinking; GB Capital has a bright future; Maintain Overweight

GB Auto managed to achieve a very positive performance amidst a very turbulent, unclear market. Commercial vehicles, after-sales services, tires, regional sales, and GB Capital managed to support the topline along with the increasing prices across all lines of business despite the shifting towards lower price points into the company’s main segment of passenger cars. GB Auto is transforming a former facility in Sadat City into a PC manufacturing facility to cater to its newest Chinese brand addition, Changan and Haval. The facility is expected to be operating by 2H23. As the company starts assembling Changan and Haval locally, along with Cherry and the few CKD models of Hyundai, AUTO could maintain steady volumes as CBU inventory runs dry in the whole market, which is expected to occur by August 2022 according to industry experts. However, when it comes to 2&3 wheelers LoB, the outlook remains blurry since there is no replacement for tuk-tuks until this point.

GB capital portfolio is expected to expand further as the current economic conditions could easily lead to a 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 3.2x and an EV/EBITDA of 7.4x.