EUR 59.82 For Business Accounts Only

Mounting pressures overshadow cheap valuation

Cut TP, on rising challenges. We turn negative on the auto business, as regulatory and competitive pressures mount for GB’s domestic passenger car and 3-wheeler verticals. We expect the auto platform to swing back to sizable losses in 2019e and 2020e (cEGP1bn combined), and believe it will continue to drain cash throughout our forecast horizon (cEGP650mn p.a., on average). We cut our TP by 30%, yet maintain our Overweight call, on a solid outlook for GB Capital (2018-22e NP CAGR of 31%), amid superior profitability (29% RoAE in 2019e vs. 14% peer average), backing our implied valuation of 2.2x P/B for 2020e. That said, we believe upcoming auto headwinds will pressure the stock, and would present a better entry point.

Industry shake-up puts auto business in a tight spot. Following a stellar 2018 for the auto platform (PC market sales +47% y-o-y), the business has taken a sharp negative turn in 2019. Y-t-d PC sales are down 11% y-o-y, and PC prices cut by 10-15%, on average y-t-d. This comes as market turbulence post the complete removal of tariffs on EU imported cars in Jan-19 coincided with the rise of domestic boycotting campaigns for PCs, calling for further price cuts. We expect GB’s auto platform to record losses of cEGP620mn and cEGP300mn in 2019e and 2020e, respectively, on: i) weak PC volumes and margins, as well as lower 3-wheeler volumes, on imposed licensing caps, coupled with escalating leverage (9.8x ND/EBITDA 2019e vs. 3.7x in 2018a).

GB Capital’s solid performance overshadowed. GB’s financing arm continues to deliver and, in our view, offers a compelling exposure to Egypt’s under-penetrated credit story. Relative to its leading position (EGP8.6bn net portfolio in 1Q19), and attractive profitability (NIMs c12%), we believe the platform is undervalued. GB Auto’s current market cap - assuming no value for the auto platform - prices GB Capital at 7.1x 2020e P/E and 1.7x P/B. We expect a 23% 2018-22e portfolio CAGR, with the low leverage (3.4x debt/equity in 2019e), presenting further room for growth.

No visible catalysts. Leaked news suggests the long-awaited automotive policy could be limited to removing component tariffs. If true, this will not be enough to turn GB’s auto arm around, as per our calculation. Prolonged losses for the auto platform suggest the demerger could be delayed beyond 2020. Implementing a policy similar to the originally proposed automotive directive is the key upside risk.