Equity Analysis /

GB Auto: Weak start for automotive business; financing arm maintains group profitability; maintain Overweight

    Farida Salama

    A Weak Start for the Automotive Business

    1Q19 'automotive' revenues amounted to EGP4,948 million, down 17.1% QoQ and up 23.3% YoY. Annual improvement came on the back of growth in the following segments: 1) regional segment by 88% (32% out of total automotive revenues), 2) commercial vehicles by 23% (c.+11% price and volume growth), 3) after-sales by 10%, and 4) tires by 60%. However, quarterly revenues were dragged by lower topline across the board except for the regional and tires segment.

    Automotive GPM came in at 10.4%, up 1.3pps QoQ and down 1.8pps YoY. Annual GPM declined across the board except for the PC segment (+1pps YoY). However, sequential improvement was driven by 1) Passenger Car (PC) margin improvement by 1.1pps on a c.6% increase in ASP and improved sales mix, 2) 2.9pps growth in the regional segment gross margin, as a result of a 22% growth in revenues, 3) 7.6pps margin expansion in the commercial vehicles segment (+6% QoQ volume growth), and 4) 0.5pps improvement in the tires segment. 

    EBITDA margin fell to 4%, down 2.3pps YoY due to higher SG&A expense (+20%). NPM came in at -2.5%, dragged by the higher net interest expense (+24% YoY).

    Financing Business: a Life Line

    AUTO’s financing arm, GB Capital, revenues for 1Q19 recorded EGP1,203 million, down 19% QoQ and up 18.3% YoY. Annually, revenues improved owing to 1) 89% growth in ‘Tasaheel’, 2) 17.5% growth in ‘Drive’, and 3) 8% in ‘Mashroey’. On a quarterly basis, revenues fell on account of a decline in 1) ‘Drive’ by 36.4%, 2) ‘Mashroey’ by 20.6%, and 3) ‘GB Lease’ by 2.2%. 

    Net interest margin settled at 13.1%, up 1.9pps due to the 100bps interest rate cut and better pricing mechanisms. NPM came in at 9.8%, on the back of improved topline performance and stronger financing margins.

    Capex Plans Contract; Maintain OW Recommendation

    AUTO’s financing arm continues to drive profitability, whereas the automotive business continues to be a burden on bottom-line. GB Capital recently signed an agreement with TMGH and HRHO to form a mortgage finance JV capitalizing on the potential of the non-financial sector and to diversify their current portfolio, however we don’t believe it will considerably contribute to GB Capital’s profitability. 

    Due to the recent three-wheelers license restrictions, FY19 capex plan, including a new three-wheelers facility worth EGP400 million, has been suspended. AUTO’s current capex plan stands at EGP250 million for maintenance expenses. 

    Demand for PC is expected to pick up during 2H19 due to seasonality as well as 3 new completely knocked down (CKD) models which will be introduced. 

    The stock price performance had been negatively impacted by the negative sentiment within the PC market in Egypt, post the reduction of tariffs on European models and consumer hesitance to buy cars before the prices settle. The market fails to see the stock as a NBFS play, but continues to react of automotive market developments more than financing business developments. To us, the story is the opposite and hence, we maintain an Overweight recommendation on a FV of EGP6.80, which is mainly driven by the financing business (EGP 4.5/share).