Earnings Report /
Egypt

GB Auto: Profitability supported by GB Capital and cost controls; maintain Equalweight

  • Net profit recorded EGP116mn in 2Q20 vs a loss of EGP19mn in 2Q19, reflecting in a NPM of 3% vs our estimate of -6%

  • Revenue recorded EGP4.0bn (-29% YoY and -32% QoQ) with EGP2.9bn from the auto arm and EGP1.3bn from the financing arm

  • Management started seeing recovery in the auto and financing businesses in line with the easing of lockdown measures

Al Ahly Pharos Securities Brokerage
13 August 2020

Lockdown pressures auto volumes; microfinance boosts GB Capital top line

1Q20 consolidated revenue amounted to EGP4,025 million, down by 29% YoY and by 32% QoQ, and 32% higher than our estimate for the quarter on a stronger than expected rebound in June automotive sales and healthy financing business performance given the circumstances.

Revenue from the automotive business came in at EGP2,882 million (-39% YoY and -39% QoQ) mirroring the decline in the Egyptian passenger car segment by -27% YoY and -33% QoQ as a result of pandemic restrictions and low seasonality relating to Ramadan and Eid which hit volumes across the whole market. In the same manner, supply disruptions and weak corporate and touristic demand hampered commercial vehicle, tires and after-sales revenue by a collective -23% YoY and -7% QoQ. The annual and sequential decline on the automotive arm was further compounded by the liquidation of the remaining Hyundai inventory in Iraq and the country’s complete lockdown throughout July, recording a revenue decline of -77% YoY and -72% QoQ. On a lighter note, the company was able to record a YoY gain of 82% on the 2 &3 wheeler segment reflecting the normalization of regulatory constraints that had hindered growth in 2Q19.

Revenue from the financing business also saw sequential contraction of -7% QoQ, on the back of slower collections, after the FRA gave factoring and leasing clients an optional six-month grace period on their payments and as a result of the 300bps rate cut that took place in mid-March. Despite the QoQ drop, financing topline recorded annual growth of 8% YoY reaching EGP1,316 million in 2Q20 supported by solid results from the microfinance company ‘Tasaheel’ (+53% YoY) and Vehicle leasing company ‘HTT’ (+28% YoY).

Automotive business records narrower losses; financing business keeps bottom line in the green

Consolidate net profit came in at EGP116 million versus a net loss of EGP19 million in 2Q19 and a net profit of EGP138 million in 1Q20. This reflects an NPM of 3% (+3pps YoY and +1pp QoQ), exceeding our estimate of -6% for the quarter.

1Q20 automotive GPM stood at 14% (+3pps YoY and +1pp QoQ) as a result of management’s strategic decision to focus on profitability by increasing the portfolio constitution of custom-advantageous  Moroccan-, Turkish-, and European-origin vehicles. In turn, the automotive business incurred a narrower net loss of EGP20 million in 2Q20, versus a loss of EGP5 million in 1Q20 and loss of EGP159 million in 2Q19. This improvement was supported by improved gross profitability, stringent cost-cutting measures and by the -46% YoY and -16% QoQ decline in net interest expense as the company capitalized on the 300-basis point rate cut and the CBE’s subsidized 8% interest on loans. On an absolute basis, net debt increased by EGP448 million since last quarter on the back of slower market activity during the quarter.

For the 7th consecutive quarter, bottomline losses from the automotive arm were absorbed by the financing business, recording attributable net profit of EGP136 million (-20% YoY and -6% QoQ) and NPM of 20% (-4pps YoY and flat QoQ) as management took a conservative approach to book higher provisions during the quarter. GB Capital maintained a healthy loan portfolio, which stood at EGP10.6 billion at the end of 1H20 (+24% YoY and +6% QoQ) while non-performing loans stood at 1.58% in 2Q20 compared to 1.50% in 1Q20 and 1.23% in 2Q19.

Better outlook heading into 3Q20

Management reported that automotive activity started picking-up in June following the resumption of licensing services at the traffic department coupled with pent up demand, and they expect it to continue on this positive trajectory heading into 2H20. The company plans to resume its plan of containing the aftermath of the pandemic through strict cost controls and treasury management. Yet, recovery on the regional front is likely to be slower and management is monitoring market activity to identify an optimal time to launch the MG brand in Iraq. 

On the financing business front, the company pursued a prudent approach to booking provisions, however they anticipate that much of it will be reversed once market activity fully recovers.

On an annualised basis, AUTO is trading at a 2020 P/E and EV/EBITDA of 5.3x and 7.8x respectively.