Share analysis: GB Auto - Consumer Goods

GB Auto is a leading automotive player in the Middle East and North Africa. It is the sole assembler and distributor of both Hyundai passenger cars (PC) as well as the Geely Emgrand 7, and the exclusive Mazda PC distributor in Egypt with a total market share of 30%, the highest among industry players. Through a 50/50 joint venture (JV) the firm imports and distributes Hyundai PCs in northern Iraq. In 2013, the company entered the dynamic Libyan and Algerian PC markets where it sells Geely PCs in JVs with local partners.

Key Contributions

The PC segment is the largest contributor to GB Auto’s top line, making up 73% of consolidated revenue in 2014. The company is also the exclusive agent for Bajaj two- and three-wheelers, part of a segment that has grown to become the company’s second-largest (11% of 2014 consolidated revenue). GB Auto’s commercial vehicle (CV) operation (7% of 2014 consolidated revenue) assembles and distributes Volvo and Mitsubishi buses and trucks, manufactures trailers for sale in Egypt and export to Algeria, and sells construction equipment.

In late 2013, GB Auto launched the seven-seater Karry, which it distributes in Egypt and Algeria. GB Auto has agreements with tire manufacturers to distribute a variety of tires in five countries. It also provides financial leasing, micro-finance, and consumer finance via three of its subsidiaries, with revenue from that segment almost comprising approximately 6% of 2014 consolidated revenue. In 2014, GB Auto entered into an exclusive strategic alliance to distribute Gazprom Neft-Lubricants. The company also operates a large after-sale service network.

The firm’s revenue increased approximately 35% year-on-year (y-o-y) to LE13.2bn ($1.8bn) in 2014, mainly on the back of higher volumes (+53% y-o-y) and prices (+13%) in the local PC segment. Its CV and financing business segments also contributed to revenue growth. Record three-wheeler sales also helped after the Egyptian government lifted the ban on the importation of their components, as demand remained resilient, given their unique buyer profile: of low-income earners who rely on three-wheelers to make a living. With higher prices more than offsetting cost increases, the company’s EBITDA margin rose 0.5 percentage points to 8.6%. As of December 2014, GB Auto’s net debt position stood at LE3.65bn ($497.5m), with a LE1.18bn ($160.8m) cash balance, which implies a net debt/EBITDA ratio of 4.3 times. The firm did not distribute a cash dividend for 2014.

Development Strategy

Having sufficient inventory to capitalise on in anticipation of a strong start to the year, GB Auto has managed to weather delayed availability of foreign currency following the cash-deposit cap imposed in February. In our view, the company will continue to secure 80-90% of its foreign exchange needs. Additionally, the continuation of Verna CKDs until 2016, as well as the imminent introduction of a lower-priced Geely model should further enhance GB Auto’s market position and allow it to capitalise on higher market volumes.

GB Auto plans to build a LE320m ($43.6m) two- and three-wheeler plant to fully assemble Bajaj-brand CKD kits. The new plant, which will have an annual production capacity of 120,000 units of each product, will be 80% financed through equity raised from the recent LE960m ($130.9) capital increase and the remaining 20% through debt. The new plant will provide the company with a more stable platform of the business and allow the company to benefit from lower Customs (5% versus 20% currently), which should reflect positively on margins.

We believe the company will continue to be a high growth stock, offering exposure to strong consumer demand, and we see the potential improvement in foreign currency supply as a key catalyst for the share price. The recent rollout of new business ventures is likely to solidify the company’s standing in Egypt, while planned expansions could offer further upside.

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