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GB Auto: Management webinar key takeaways

  • 2020 on the ground update & 2021 guidance

  • GB Capital

  • Government’s natgas initiative

Al Ahly Pharos Securities Brokerage
24 January 2021

2020 on the ground update

  • 2020 reflects the recovery of AUTO’s market and renewed demand for the products. Volumes across lines of business have taken a turn and continued to grow driving strong topline growth. Meanwhile, the improved pricing and operational efficiencies helped drive shift the bottom-line to the green.

  • The most significant milestone for the year was achieving bottom-line profitability at the A&AR segment compared to losses for the previous years.

  • A&AR segment has achieved and exceeded the guidance for revenue and gross profit margin for 4Q20 which were EGP5.1 billion and 12.8%, respectively.

  • Bottom-line is expected to be around EGP900 million for 2020, implying 2020 P/E of 4.5x.

  • There was an uptick in SG&A during the fourth quarter. The majority of which is related to end of year bonus accumulation. SG&A as a percentage of revenues jumped to 9% in 2020 as a result of bonuses.

  • AUTO will work to reduce debt of A&AR segment which stood at EGP4.8 billion at the end of December 2020 to EGP3.3 billion over the next one-two years.

  • AUTO benefited significantly from the reducing interest rates in 2020 as it used to pay around EGP125 million/ month as interest expense, translating into EGP1.4 billion/year.

  • 4Q20 was the best quarter for 2&3 wheelers with EGP940 million revenues coming from the sales of almost 16k vehicles of 2 wheelers and 19,800 vehicles of 3 wheelers. Total revenues for 2020 coming from 2&3 wheelers is around EGP3 billion. The demand is so strong for the 3-wheeler market as it has no substitutions. GPM is between 18-18.2% for 2&3 wheelers.

  • Commercial vehicles in 2020 is the worst line of business as it was hardly hit by tourism. It recorded a GPM of around 8% which is lower than the normal GPM of 12%.

  • Tires business line achieved EGP1.1 billion in revenues for 2020 with GPM of around 20% translating into gross profit of around EGP256 million.

  • In 2020, AUTO expects to have EGP800-850 million of interest expense payments.

  • AUTO is considering dividends distribution for the first time since 2013.

2021 guidance

  • The trends witnessed in 2020 will hopefully continue throughout 2021. On the financing business, recovering market conditions will continue to drive growth in disbursements and support GB capital.

  • New organization-wide digital transformation initiatives are anticipated to boost efficiency and bolster GB capital's profitability going forward.

  • Management expects total market of 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.

  • GPM for passenger car should be between 8-9% in 2021.

  • In 2021, AUTO expects to have EGP800-850 million of interest expense payments.

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

  • AUTO plans to spend around EGP260 million as capex for 2021.

  • Tires business line revenues for 2021 is expected to be around EGP1.3-1.4 billion.

  • Starting from January 2021, all cargo shipment containers raised their prices; consequently, AUTO raised the prices by around 2%. However, the demand is very strong and purchasing power is increasing in the market, so there is no problem in passing price increases to the market to maintain the GPM between 8-9%.

  • SG&A as a percentage of revenues is expected to be 7-7.5% in 2021.

GB Capital

  • GB capital has surpassed the 4Q20 forecast of EGP230 million net profit after tax and minorities by at least 10%.

  • During the fourth quarter of 2020, some provisions are going to be reversed for GB Capital.

  • Rate cuts have had a positive impact on the micro finance business, as well as an increased appetite on the leasing side of the business.

  • AUTO had two securitizations on the last days of 2020, GB Lease securitized approximately EGP2 billion and Drive securitized about EGP900 million. It expects the portfolio at the end of 2020 to be EGP11.5 billion.

  • AUTO is considering selling minority stakes in the NBFI companies to strategic investors that can add value.

  • Provisions aren't expected to see a spike since the microfinance business, which is typically the riskiest, is already more than sufficiently provisioned.

  • Collections were hardly hit in April-May 2020 and were in the range of 70%, then they increased gradually to 90% and currently they are 95%. All new issuance are almost 99% collections.

  • Management believes that it could benefit from cross-selling products from GB Capital to New City Housing and Development.

  • Construction is expected to begin in March for “Echo” project by New City Housing and Development. Total cost of construction in EGP2.1 billion and it will have 160 buildings. Each building has 24 units. Average price per unit is expected to be between EGP850 million-EGP1 billion. The total area is 620 feddans in 6th of October city and the undeveloped portion is 120 feddans.  

Government’s natgas initiative

  • AUTO stands to benefit from the government's initiative to replace old cars with new natural gas models. The first year, the program plans to cover 70,000 cars that have been on the road for over 20 years, including 55,000 taxis and passenger cars and 15,000 micro buses followed by 90,000 cars for year two and another 90,000 cars for year three. AUTO is expected to participate in this program through 12,000 vehicles.

  • This initiative will be an important opportunity for GB Auto in 2021 in terms of volumes.

  • Currently AUTO has two models that are ready to sell, Hyundai Elantra HD and Accent RB, and it expects at least 20-25% market share in this segment.

  • Although the margins on these models are very low, it will gain market share as well as added walk-ins/traffic to its service centers.

Regional update

  • Iraq passenger cars in 2020 was negatively impacted by COVID as well as low petroleum prices. AUTO is optimistic that 2021 will be better. Hyundai inventory in Iraq has almost been sold and only 450 units left.

  • The new MG representation in Iraq is doing very well and AUTO expects to sell 5,000 MG units in 2021.

  • Management is expecting to sell 12-14k vehicles per annum of MG in Iraq by year 2023.

  • MG’s average price will be between USD17-20k. It is cheaper than Hyundai but has better margins.

  • Hyundai’s GPM is 5-5.5% but MG’s GPM is around 8%.

  • AUTO is exploring a second brand in Iraq.

  • AUTO started selling MG brand in Iraq in September/October 2020 and AUTO is selling 200 units /month of MG (soft launch).