Earnings Report /
Egypt

GB Auto: 3Q22 – Cost optimisation saves the day; GB Capital continues to rise

  • Auto business continues to cast a shadow over revenues despite growth in GB Capital’s top-line

  • Cost optimisation led to healthy margins; GB Capital continues to rise

  • All is bright once materialised

Al Ahly Pharos Securities Brokerage
16 November 2022

Auto business continues to cast a shadow over revenues despite growth in GB Capital’s top-line

3Q22 consolidated revenues came in at EGP7,212 mn, dropping by 13.0% YoY and 7.9% QoQ, backed by the challenging conditions faced by the auto & auto-related segment. 9M22 revenues recorded EGP22,888 mn compared to EGP22,390 mn, a rise of 2.2% YoY driven by a solid previous quarter and heightened YTD prices compared to 9M21.

  • Revenues for the Auto & Auto-Related (A&AR) business line recorded EGP5,149 mn (-21.3% YoY, -11.6% QoQ) due to the great challenges facing the sector by the implemented import restrictions and the slowdown in opening of LCs, which limited supply across the portfolio.

  • Passenger cars sales came in at EGP2,142 mn, dropping by 36.5% YoY and 21.5% QoQ, despite the ASP rising by 11.0% YoY and 5.4% QoQ; the effect of the decline in volumes was of a greater magnitude of 42.8% YoY and 25.6% QoQ, while the whole market contracted by 34.1% QoQ and 53.8% YoY during the quarter. AUTO managed to maintain its market share at 28.9% for 3Q22 compared to 23.2% in 3Q21, due to its diversified portfolio of brands between CKD and CBU.

  • The Two & Three Wheelers segment revenues recorded EGP416 mn compared to EGP894 mn in 3Q21 and EGP582 mn in 2Q22 (-53.4% YoY, -28.5% QoQ). The drop came backed by the steep decline in volumes by 64.7% YoY and 32.6% QoQ due to the restriction of the three wheelers imports. The company is currently working with the government to introduce a proper replacement for the three-wheeler segment.

  • Commercial vehicles segment achieved revenues of EGP295 mn (+23% YoY, -24.1% QoQ), backed by a 2.1% YoY rise in volumes and a sequential decline of 19.6%, while prices climbed by 20.5% YoY and dropped by 5.7% QoQ. Bus sales continue to be affected by the Russia-Ukraine War’s impact on tourism.

  • After-Sales Service segment achieved revenues of EGP480 mn for the quarter (+28.4% YoY, +19.4% QoQ) as consumers continue to face challenges in purchasing new vehicles and focus on maintaining their existing vehicles.

  • The tires segment recorded revenues of EGP414 mn (+5.7% YoY, +14.8% QoQ), on the back of healthy market demand for AUTO’s product offerings and brands.

  • On the regional front, revenues recorded EGP1,170 mn compared to EGP880 mn in 3Q21 and EGP1,154 mn in 2Q22 (+32.9% YoY, +1.4% QoQ), on the back of a rise in PC volumes by 23.4% YoY.

GB Capital revenues recorded EGP2,437 mn (+18.5% YoY, +3.4% QoQ), reflecting a strong performance across subsidiaries. On 9M22 basis, revenues grew by 20.3% YoY to hit EGP6,781 mn. NPLs/Loan portfolio ratio decreased slightly to reach 2.39% in 3Q22 compared to 2.48% in 2Q22, yet still higher from that recorded in 9M21 of 2.28%.

Cost optimisation led to healthy margins; GB Capital continues to rise

Consolidated attributable net income for the quarter amounted to EGP551 mn, a remarkable incline of 65.8% YoY and 12.7% QoQ due to the company’s comprehensive operational efficiency initiatives and improving pricing strategies, leading to a NPM of 7.6%, versus 4.0% recorded in 3Q21 and 6.2% in 2Q22 (+3.6pps YoY, +1.4pps QoQ). 9M22 attributable net income came in a EGP1,269 mn, compared to EGP1,005 mn in 9M21, showing a YoY growth of 26.3%, leading to a NPM of 5.5%, versus 4.5% in 9M21.

  • The A&AR segment’s net income climbed by 71.6% YoY and 48.7% QoQ to reach EGP318 mn backed by the trickling down of healthy gross profitability by shrinking costs and expenses. This led to a NPM of 6.2%, versus 2.8% in 3Q21 and 3.7% in 2Q22 (+3.3pps YoY, +2.5pps QoQ). 9M22 bottom line for the A&AR segment came in at EGP641 mn compared to a previous EGP595 mn (+0.4% YoY), leading to a NPM of 3.7%, versus 3.4% recorded in 9M21 (+0.4pps).

  • 3Q22 automotive gross profit recorded EGP1,100 mn (+28.1% YoY, +16.8% QoQ), leading to a GPM of 21.4% versus 13.1% recorded in 3Q21 and 16.2% in 2Q22. The climb came backed by the severe decline in COGS by 29% YoY and 17% QoQ due to the company’s strategies at cost cutting and efficiency. 9M22 gross profit recorded EGP2,948 mn compared to EGP2,383 mn recorded in 9M21, a rise of 23.7% YoY, leading to a margin of 17.2%, versus 13.4% (+3.8pps YoY).

  • A&AR working capital dropped by 1.6% YoY and 18.7% QoQ. The cash conversion cycle for the quarter recorded 65 days, versus 71 days in 2Q22 and 43 days in 3Q21. Inventory days dropped to 80 days during 3Q22 compared to 85 days in 2Q22, yet remained above 55 days recorded in 3Q21.

  • The financing business bottom-line amounted to EGP233 mn (+59.2% YoY, -15.9% QoQ), leading to a NPM of 9.6%, versus 7.1% recorded in 3Q21 and 11.7% in 2Q22 (+2.4pps YoY, -2.2pps QoQ). 9M22 net profit recorded EGP632 mn, compared to EGP411 mn recorded in 9M21, with a margin of 9.3% versus a previous of 7.3%. The sequential decline in bottom-line is mainly attributed to Tasaheel securitisation in 2Q22.

  • GB Capital continued growing its loan portfolio to reach EGP18,309 mn by 9M22, compared to EGP16,105 mn recorded in 1H22 and EGP16,575 mn recorded in 9M21 (+10.5% YoY, +13.7% QoQ).

  • ROAE stood at 22.6% in 9M22 compared to 22.2% in 1H22 and 18.9% in 9M21.

  • Net interest margin climbed to 19.4% in 9M22 from 18.5% in 1H22 and 16.9% in 9M21.

  • Coverage ratio climbed to 85% from a previous 83% recorded in 1H22, yet dropped from the 117% recorded in 9M21.

All is bright once materialised

AUTO managed to deliver healthy profitability despite the challenging conditions given the good management of inventory, cost optimisation strategies, and having a solid portfolio of cars brands. 2023 is expected to be a positive year for AUTO by the removal of import restrictions and the implemented prices increase. The new factory that will locally manufacture Changan and Haval is expected to launch by the end of 2023, bringing the company’s portfolio of locally assembled brands to four brands, contributing positively to margins. Moreover, the company is currently in negotiations with the government to reach a replacement to tuk-tuks after banning their importation. With the materialisation of MNT stake sale, removal of import restrictions, and planned securitisation, AUTO is expected to witness a positive start for 2023.

AUTO is currently trading at a FY23 P/E of 3.0x and an EV/EBITDA of 5.6x.