Equity Analysis /

GB Auto: Cut FV by 52% and downgrade to Equalweight

  • We trim our FV by 52% to EGP2.65/share and downgrade to an equalweight recommendation

  • Covid-19 will likely hit the automotive business in Egypt and Iraq across all LoBs

  • Slower Portfolio growth and worsening asset quality will cap 2020 bottomline growth in the financing business

Slash valuation on market uncertainty 

We trim our FV on AUTO by 52% to EGP2.65/share and downgrade to an equalweight recommendation on the back of a bleak 2020 outlook. We update our DCF valuation on the automotive business, contributing to c.6% of our SOTP valuation, to EGP0.15/share, down from EGP0.52/share. We cut our forecasts in light of the challenging environment caused by covid-19. We also updated our valuation for AUTO’s financial arm GB Capital, based on the average of the residual income method and NBFI multiples, yielding a FV of EGP2.50/share down from EGP5.52/share. 

Automotive Business: Recovery hampered by Covid-19

Egyptian passenger car (PC) sales began on a high note in 2020, recording a 38% YoY increase in volumes in 1Q20 according to AMIC, on the back of the appreciation of the EGP and the full elimination of customs on Turkish and EU-sourced vehicles, which softened prices and had encouraged demand. However, the covid-19 outbreak began taking its toll on automotive demand once again by mid-March following the closure of the traffic department, the slowdown in tourism and construction activity and shorter showroom hours. Additionally, the current state of economic volatility will likely result in the delay of vehicle upgrades or repurchases which will further compound the slowdown that accompanies Ramadan season. We remain cautious about recovery in the Egyptian automotive market throughout FY20, as we expect the shock to income levels on the back of the COVID-19 pandemic to negatively impact the demand levels while compounding price competition which will further diminish AUTO’s market share in the PC market. 

Financing Business: Off to a rocky start

Despite keeping the company’s consolidated bottomline in the green since 4Q18, we see some near-term contraction in portfolio growth and deterioration in asset quality in the aftermath of covid-19. Yet we expect the company to stay profitable, backed by the declining interest rate environment and an underleveraged balance sheet. We factor in a 10% decline in GB Capital’s loan portfolio in FY20 and a higher booked provisions to account for the impending economic hardship on business, resulting in a 19% YoY decline in 2020 net profit and -1pps decline in NPM. Beyond 2020, we view the company continuing on its gradual recovery and healthy growth, fueled by economic recovery and the gradual return of appetite for borrowing, given the low penetration rates present in the market.