EUR 110.99 For Business Accounts Only

AUTO EY | Turnaround story confirmed; Maintain Overweight

Overhangs resolved; Dividend resumption highly positive. We raise our TP by 13.6% to EGP6.00/share and maintain our Overweight call. The latest results confirm the auto business is turning profitable (net profit of EGP117mn on a recurring basis in 2H20 and EGP144mn in 1Q21), after nearly four years of losses, resolving an overhang that has long pressured the Group. GB distributed EGP0.25/share for 2020, representing a dividend yield of 7.4%, on current market price, further confirming that the Group no longer faces cash pressures. GB trades on a 2021e P/E of 3.36x and 3.91x in 2022e vs. 13.2x and 10.9x for global auto peers, respectively, and 10.5x and 7.7x for NBFS peers. We expect a dividend yield of 10.4% in 2021e and 2022e.

Raise auto business’s valuation substantially, on higher margin and volume outlook, lower WACC. We raise auto business’s valuation to EGP1.57/share (26.2% of Group value), up from EGP0.15/share previously. This reflects c95bps higher margins, on a better sales mix, 4% higher PC volume forecast over 2021-25e, and, to a lesser extent, 15bps lower WACC, given that the company is heavily leveraged (2021e net debt of EGP5.2bn, 3.7x EBITDA). We expect the auto business to remain profitable, accounting for 26.2% of the Group’s value, as a result of solid volume recovery (PC volume 2021-25e CAGR of 6.7%), and improving net margins, on constant leverage levels, such that GB Auto’s auto arm should generate a net income of EGP380mn in 2021e, on our figures, rising at a 2021-25e CAGR of 15.4%.

GB Capital remains a deep value business; Microfinance stake sale positive. We lowered our valuation for GB Capital to EGP4.43/share (73.8% of Group’s value), down from EGP5.10/share. This comes primarily on hiking the segment’s cost-to-income ratio, following the jump witnessed in 4Q20. We expect the segment’s net income and portfolio to grow at a CAGR of 4.69% and 15.1% over 2021-24e, respectively (vs. a 15.7% net income CAGR for domestic peers over the same period). On 12 April, GB Capital signed a deal to sell a 5% stake in its microfinance subsidiaries for EGP353mn, implying a valuation of EGP4bn for their remaining stake in the microfinance business alone, signalling the deep value within GB Capital’s subsidiaries. Our implied valuations for GB Capital stand at a 2021e P/BV 1.78x, against a sustainable RoE of c25% (vs. 1.12x P/B for global peers against an average RoE of 11.7%.                                                                                                                                                                                                   
Positively skewed risk profile. Tariff reduction on non-European PC brands (currently 40% vs. 0% for European brands), or higher volumes from the government’s green initiative, could raise our valuation for auto substantially. On the downside, there is a risk of short-term disruptions, on global material shortage, which could impact the company’s operations in the short-term. For Auto, each 1pp gross margin reduction/expansion undermine/lift our TP by c42%, all else constant. Meanwhile, for GB Capital, we estimate 12.5% and c5% reduction/accretion in TP for each 1pp lower/higher group NIM, and 5% lower portfolio volume, all else constant.