EUR 91.68 For Business Accounts Only

AUTO EY | Cheap valuation; Auto business to turn profitable in 3Q20

Significant upside, with catalysts. GB Auto trades on a 2021e P/E of 3.24x vs. 13.2x for global automotive peers and 10.5x for NBFS peers, with EPS growing at 33.1% over 2021-22e vs. 29.0% and 21.1% for peers. We look for the company to distribute EGP0.07/share in 2021e, through streamlining cash flows from the financing business, potentially unlocking GB Capital’s value, yielding 2.54% in 2021e and rising to 9.05% in 2022e. GB Auto’s valuation mainly comes from GB Capital, but has long been pressured by the negative performance of the Auto business, undermining the value, at the Group level. However, the Auto business is imminently turning profitable, paving the way for the market to extract value from GB Capital and the Group.

GB Capital – a deep value story. GB Capital remains the crown jewel of the Group, representing EGP5.13/share of our TP and 100% of estimated dividend distributions. We expect GB Capital will deliver a solid performance in 2020e (portfolio growth of 28.8%) amid challenging dynamics, imposed by the COVID-19 pandemic. We expect GB Capital to maintain its robust growth story beyond 2020e (portfolio and earnings CAGR of 18.0% and 16.8% over 2020-25e, respectively), thanks mainly to Egypt’s attractive growth dynamics, rising penetration of the NBFS services, and as the effect of the CBE’s 10.5% rate cut over 2018-20 bears fruit. Our valuation for GB Capital of EGP5.13/share puts the stock at a 2021e P/BV of 1.68x vs. 2021-23e average RoEs of 25.9%.

Auto business turns profitable in 3Q20, but long-term profitability to remain feeble; Cash flow pressured. We look for the Auto business to turn profitable, starting 3Q20 (We look for gross profit of EGP613mn, +9.23% y-o-y and +52.9% q-o-q), removing an overhang, which has pressured the company’s operations and valuation since 2016, offering a short-term catalyst, as it reduces the cash drain on the Group. However, beyond 2020e, we presume pent-up demand to lead to PC sales CAGR of c15% over 2020-23e (vs. -15% over 2016-20e), yet expect profitability to remain feeble (net margin of 0.3-1.7%), pressured by tough competition and heavy balance sheet. We foresee the Auto business’s heavy WC needs (2020-25e total of EGP2bn) and weak profitability leaving no scope for deleveraging.

Regulatory changes needed to unlock full potential of Auto business. As of yet, there is no visibility as to when the long-awaited automotive directive should be released, and in that case, its impact on the challenging industry dynamics. The government currently mulls expanding autos that run on natural gas, which could boost demand over and above our estimates. Lower-than-expected NIMs and portfolio growth are the main downsides for GB Capital, while tougher-than-expected industry dynamics and margins are the main downside for GB’s Auto business.