Equity Analysis /

GB Auto: Q2 19 – Auto segment drags profits; maintain Overweight

    Farida Salama
    Diyar Hozaien
    Al Ahly Pharos Securities Brokerage
    7 August 2019

    Bottom local market contraction sinks sales volume; regional sales heat up 

    Q2 19 automotive revenue came to EGP4,692mn, down 10.3% yoy and 5.2% qoq. The decline was mainly attributable to the slowdown in the passenger cars (PC) and two & three wheelers segments (contributing c39% of total automotive revenue). The PC segment saw both volume (-47% yoy, +4% qoq) and price (+7% yoy, -6% qoq) shrinkage as consumers have delayed purchasing decisions amid the unstable auto-market conditions. 

    Likewise, the two & three wheelers segment saw a 63% yoy and 59% qoq decrease in revenues as a consequence of the new monthly licensing limits imposed on the three wheelers segment. The commercial vehicles and construction equipment segment also registered a drop in volumes (-23% yoy and -15% qoq) on the back of lower truck volumes (-63% yoy). Meanwhile, the tires and regional segments saw impressive qoq growth of +3% and +13%, respectively. AUTO was successful in executing its regional revenue development strategy in Iraq, supported by the strong demand for the PC and two & three wheeler segments in the country.

    Automotive GPM stood at 10.5%, -1.3ppts yoy but flat qoq. The annual and sequential (-4.9ppts yoy and -5.1ppts qoq) decrease in the PC segment’s GPM overshadowed the slight expansion in the other segments, as AUTO offered notable discounts on old PC inventory brought at pre-EGP appreciation prices. On the other hand, AUTO passed on price increases in the two & three wheelers segment to compensate for the lower volumes. Attributable NPM came in at -3.4%, dragged by the higher net interest expense (+68% yoy). The EGP700mn increase in total debt was to finance CAPEX and the liquidity squeeze given that the automotive segment has been accumulating losses since Q4 18.

    Financing business continues upward trend

    Q2 19 revenues for GB Capital – AUTO’s financing arm – recorded EGP1,219mn, up 9.1% yoy and 6.8% qoq. Annually, revenues improved owing to: 1) the 75.8% increase in Tasaheel, 2) 35.0% in Haram and 3) 23.9% in GB Lease. On a quarterly basis, revenues improved on account of an expansion in: 1) Drive by 23.8%, 2) Tasaheel by 17.6%, and 3) GB Lease by 15.7%. Despite the improvement in overall performance of the financing business, Mashroey saw a sharp contraction in revenues (-22.7% yoy and -24.6% qoq) on the back of the slowdown in the three wheelers market. 

    GB Capital's loan portfolio remained stable at EGP8.6bn as of 30 June 2019. Excluding the effect of the EGP767mn securitisation transaction that took place at GB Lease, GB Capital’s loan portfolio would stand at EGP9.4bn (+37% yoy, +9% qoq). Net interest margin settled at 13.5%, up 0.4ppts on the back of the 100bps rate cut that took place at the beginning of the year, as well as better cost of funds negotiations with the banks and improved pricing mechanisms. NPM came in at 13.9%, on the back of improved top line performance and stronger financing margins. 

    Better H2 19 prospects; maintain Overweight

    To adjust to the current market pricing conditions, AUTO adapted a strategy to increase its offering of locally-assembled Korean, Japanese and Chinese passenger cars starting with the Chery Arizzo 5, which was introduced in August 2019. 

    Going forward, a more accommodating regulatory environment would aid in the recovery of PC and three wheeler volumes as there is plenty of pent-up demand in the market. According to AMIC, the PC market has shown signs of recovery with Q2 19 sales volumes amounting to 27,909 units, up 19.3% qoq but down 15.4% yoy. PC volumes are expected to pick up during H2 19 due to seasonality as well as the introduction of two new completely knocked down (CKD) models.