EUR 96.51 For Business Accounts Only

AUTO EY | On a bumpy road; Cut to UW

Downgrade to UW from N. We cut our 12M TP for GB Auto by 27% and 2022e net income forecast by 24%, on: i) mounting pressure on the auto business, given higher inflation, ii) rising interest rates in a highly leveraged business (auto business 2022e net debt/EBITDA at 4.3x), and iii) higher-than-expected Dec-21 net debt in the auto unit of EGP5.1bn. While the stock trades on a 2022e P/E of 6x, a 35% discount to global auto peers and an 18% discount to NBFS peers, we believe there is further downside due to the stock’s clouded risk profile, inferior growth (2022-24e EPS CAGR of 10% vs. 14.6-19.5% for auto and NBFS peers), and Egypt’s higher interest rates.        

Interest rate hike and EGP weakness pose challenges. This is due to: i) lower discretionary spending, owing to current macro dynamics (GB Auto raised its PC prices by 9-11% overnight following EGP weakness; we look for PC volumes to drop 15% y-o-y in 2022e), ii) global supply chain disruptions, and iii) Egypt’s rising interest rates, given the auto business is highly leveraged. We look for the auto segment’s net income to decline 65% in 2022e.

Limited impact of higher interest rates on GB Capital. We expect GB Capital’s NIM to temporarily compress in 2022, on higher cost of funding, coupled with a fixed rate portfolio, before normalising going forward. However, we do not see NIM expansion, on higher interest rates beyond 2022e, given intensifying competition in the NBFS sector, restricting GB Capital’s ability to expand its margins.

Risks: Regulatory changes, automotive directive, sale of GB subsidiaries. Key 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. We value MNT at EGP3.5bn, in line with the implied valuation for the previous stake sale transaction during 2021. Only an implied valuation of at least EGP4.7bn (18% higher than the previous transaction) from a stake sale would warrant a change in our Underweight rating to Neutral, all else constant.