AUTO EY | Cut to N post strong rally, negative developments
Valuation full. GB Auto’s stock rallied by 49% since our latest report in May-21, and more prominently over the past month (+24.7% m-o-m), supported by treasury share purchases. This puts the stock on a 2022e P/E of 4.3x. While this is still over 50% below global auto and NBFS peers, respectively, it is justified, in our view, by the high interest rate environment (auto segment’s 2022e net debt is 3.2x EBITDA) and GB’s limited growth potential (EPS CAGR of 1.2% over 2022-24e vs. 17.7% and 15.5% for auto and NBFS peers, respectively). That said, we cut our 12-month TP by 7%, downgrading to N from OW, on the back of the 3-wheeler import ban and rising RfR (we assume after-tax treasury yield rise by 0.8pp by the end of 2022).
3-wheeler import ban negative for the two divisions: Auto and Capital. On 10 Nov-21, the Ministry of Trade and Industry issued a decision to ban the importing of 3-wheelers and their parts. We expect this to reflect on GB Auto starting 2Q22, when 3-wheelers’ inventory depletes. 3-wheelers currently contribute 14% to the auto business’s gross profit and c4% of GB Capital’s gross profits, on our estimates, (40% of Mashroey’s portfolio is composed of loans to 3-wheelers). This translates into EGP578mn of lost profits, 42% of 2021e net income.
Exceptional 2021e PC performance likely to reverse. Despite supply chain disruptions in the auto business, GB Auto outperformed the market in 2021, as it benefited from less intense shortages in Asia (thanks as well to the introduction of two new Chinese brands in 2021) at the expense of European players. We project such dynamics to continue in 2022 and gradually retrogressing in 2023e. We look for GB Auto’s PC market share to steadily normalise to 23% from 25% in 2022e, at a PC gross margin of 9.4% vs. 12.3% in 2021e.
Risks: Automotive directive, sale of GB subsidiaries. Despite our unfavourable outlook for GB’s auto business over 2022-23, we foresee the company reporting strong results in 4Q21, before worsening starting 2Q22. Risks to our forecasts and valuation include: i) regulatory changes in the auto industry, with unpredictable changes to the current competitive landscape, and ii) sale of GB Capital’s subsidiaries at a different valuation than forecast. GB Capital represents 84% of our SoTP valuation.
GB Auto is a player in the MENA region's automotive industry. Co. operates at all levels of the value chain, including assembling, distributing and selling passenger cars and commercial vehicles, manufacturing semi-trailers and superstructures for trucks and buses, selling automotive components, motorcycles and three-wheelers, tires, and construction equipment, as well as providing after-sales service through an aftersales service network and consumer finance and microfinancing. Co. also provides private freight transport services in governorates throughout Egypt. Co.'s operations can be divided into two segments: Passenger Cars, and Commercial Vehicles and Construction Equipment.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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