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Securities & Investment

Category: HC News

Egypt currently relies on foreign portfolio inflows as a main source for foreign currency, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla
  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 18th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “February inflation figures came in lower than our estimates of 4.9% y-o-y and 0.5% m-o-m, which we believe reflects suppressed consumer demand currently. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.4% y-o-y accounting for possible domestic price shocks following the recent commodity price rally and possible recovery in consumer confidence following the successful rollout of the COVID-19 vaccine. Our numbers rule out domestic gasoline price increases since the current market price reflects a Brent price of USD61/barrel (as estimated in the FY20/21 government budget). We estimate FY20/21e average Brent price at USD54/barrel, as it averaged USD44/barrel in 1H20/21 while Bloomberg consensus estimates for 2H20/21 come at USD62/barrel. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. On the external position front, however, we believe that Egypt currently relies on foreign portfolio inflows as a main source for foreign currency given slashed tourism revenue and low exportation activity. Hence, with treasury yield hikes in the USA as well as different emerging markets such as Turkey, we believe that the CBE has limited room to undertake further interest rate cuts in its upcoming meeting. We believe that global interest rate hikes reflected in a decline in average monthly portfolio inflows in Egyptian treasuries to USD1.25bn during January and February from USD2.29bn in 2H20. We, accordingly, expect the MPC to keep rates unchanged in its upcoming meeting. That said, we note that Egyptian 12M treasuries currently offer a real yield of 5.1% (given a nominal yield of 13.3%, 15% tax rate on treasuries’ income for American and European investors and our 2021e average inflation forecast of c6%) which is higher than Turkey’s real yield of 2.0% (given nominal yield of 15.7% on 14M treasuries, zero tax rate, and Bloomberg 2021 inflation forecast of 13.7%).”

It is worth mentioning that, in its last meeting on 4 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the second consecutive time after undertaking cuts of 50 bps twice in its September and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.5% in February from 4.3% in the previous month, with monthly inflation increasing 0.2% m-o-m reversing a decline of 0.4% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC is positive on the Egyptian economy… Shifting to higher-beta stocks

Posted on by Marwa Nakhla

  • HC Securities and Investment Research Department released its latest report about Egypt’s macro economy. They assured that they are positive on the Egyptian economy, which fared better-than-expected in light of COVID-19, on IMF and government supports.

  • Private sector pickup materializing on monetary easing, moderate inflation, and stable EGP
  • We are positive on the Egyptian economy, which fared better-than-expected in light of COVID-19, on IMF and government supports
  • We are bullish on real estate, financials, and select industrial and consumer names, filtering through to 9 high-conviction picks

HC’s research team explained: “Our 2021e macro assumptions entail moderate inflation, stable EGP, and further 100 bps policy rate cuts: Despite COVID-19 concerns, we are bullish on the Egyptian economy in 2021 following a total 400 bps policy rate cuts in 2020, our expected 100 bps rate cut in 2021, inflation moderating to an average c7%, and EGP stability, in our view. Starting July 2020, the Egyptian government eased COVID-19 restrictive measures, highlighting its unwillingness to impose any curfews or lockdowns during a second pandemic wave. Despite this, the health system remained under control, which has helped Egypt to record positive GDP growth of 3.6% in FY19/20, while the IMF estimated all MENA countries to record negative GDP growth in 2020.  While the FY19/20 GDP growth was supported by a 5.4% growth in final consumption (public 7.2% vs. 5.2% private), we expect an FY20/21e GDP growth of 2.8%, supported by 6.2% growth in total investments (public 7.0% vs. 5.6% private). We expect slashed tourism receipts to result in a wider current account deficit of c4% of GDP in FY20/21e from c3% in FY19/20 despite Egypt recording an oil trade balance surplus in FY20/21e, and worker remittances increasing c10% y-o-y in FY20/21e, on our estimates. That said, Egypt’s carry trade remains appealing, offering a 12M positive real interest rate of 4.1%, on our calculations. We hence see robust portfolio inflows, which–together with Eurobond issuances and the IMF loans –should finance Egypt’s debt repayment and help the BOP reverse to a surplus of USD1.70bn in FY20/21e, from a deficit of USD8.59bn in FY19/20, in our view.”

HC’s analysts concluded: “Against this macro backdrop, we stick to 9 high-conviction picks in real estate, financials, and select industrial and consumer names, based on which we present our proposed equity investment portfolio with the highest risk-adjusted return: Considering our macro view, we prefer sectors benefiting from a low-interest-rate environment, pent-up demand, stable EGP, private consumption recovery and a pickup in private investment. These criteria lead us to pick stocks in real estate, financials, and select industrial and consumer names. Last year we preferred stocks with limited downside risk. However, going into 2021e and in light of our economic view, we currently recommend shifting to higher beta stocks and stick to 9 high-conviction picks. Our picks are Orascom Construction in the industrial sector, Eastern Company, and GB Auto in the consumer sector, Commercial International Bank, Abu Dhabi Islamic Bank Egypt and EFG Hermes Holding in the financial industry, and TMG Holding, SODIC and Orascom Development Egypt in the real estate sector.”

HC Increases its 12M TP for CI Capital by c19% to EGP5.47/share

Posted on by Marwa Nakhla

HC Increases its 12M TP for CI Capital by c19% to EGP5.47/share, The firm Capitalizes on NBFS impressive growth

  • HC Brokerage recently updated the market on CI Capital and their NBFS impressive growth. HC stated that it increases its 12M TP for CI Capital by c19% to EGP5.47/share on lower COE and maintain the OW rating.

  • We expect monetary easing and private sector pickup to support leasing and investment banking operations, while financial inclusion should benefit microfinance loan growth
  • CI Capital is currently a target of acquisition by Banque Misr. We expect synergies from this deal to have positive spillover effects on the company’s different operations
  • We increase our 12M TP for CI Capital by c19% to EGP5.47/share on lower COE and maintain our OW rating.

Monette Doss, head of macro and financials commented: “We expect 2020e–25e consolidated net profit CAGR of c20% on NBFS growth and improved stock market activity from last year’s troughs: Monetary easing, including 400 bps policy rate cuts in 2020, reflected positively on Corplease’s operations with its net leasing portfolio growing by c56% y-o-y in 9M20, exceeding our earlier estimate by c19%. However, the company’s net interest margin (NIM) declined to 4.6% in 9M20 from 5.5% in 2019. Going forward, we expect the company’s net leasing portfolio to grow at a 2020e–25e CAGR of c24%, maintaining an average leverage of 6.1x, as it tends to securitize c45% of its new annual bookings and expect its NIM to average 4.4%. We raise our provisions estimates over our forecast period to account for higher-than-expected net leasing portfolio growth, and accordingly downward revise our leasing 2021e–24e net earnings estimates by c8%. The company’s microfinance arm, Reefy, managed to outpace the c20% y-o-y sector growth in 9M20, growing its loan book c35% y-o-y to EGP849m and increasing its market share to 4.8%, from 4.2% in 2019, based on our calculations. As we move forward, we expect the government’s financial inclusion efforts to reflect positively on microfinance loan growth, and hence estimate Reefy’s loans to grow at a 2020e–25e CAGR of c26%, outpacing sector growth of c17% over the same period, while we expect NIM to gradually decline to c31% by 2025e from c41% in 2020e. We mostly maintain our previous 2021e–24e net earnings estimates for Reefy. The impact of COVID-19 on emerging stock markets in 2020, worsened by the EGX30 underperforming other markets and dropping c22% y-o-y, has negatively reflected on CI Capital’s investment banking operations with net revenue declining by c27% y-o-y in 9M20. Accordingly, we downward revise our IB 2021e–24e net earnings estimates by c33%, however, we expect it to grow at a 2020e–25e CAGR of c36%, coming from a low base.”

“The IPO of CI Capital’s 16.5%-owned education arm, Taaleem Management Services, to possibly occur in 1Q21:  We positively perceive the company’s direct investment in the education sector through its 16.5%-owned Taaleem Management Services as the sector enjoys high growth potential. On Thursday, the company announced that it submitted its registration application to Egypt’s Financial Regulatory Authority (FRA) to list its shares on the Egyptian Exchange (EGX) through an initial public offering (IPO). The offering consists of a secondary sale of shares by Sphinx Obelisk of up to 358m ordinary shares on the EGX, representing up to 49% of its share capital post completion of the offering. Taaleem owns and operates Nahda University in Beni Suef with two campuses in the governorate, and a total capacity of just over 11,000 students and more than 6,270 enrolled students for the academic year 2020/2021. The university consists of 8 faculties and is planning to add three more faculties over the next three years, subject to obtaining regulatory approvals, which will increase its student capacity by c27%. Additionally, Taaleem entered into a joint venture with Palm Hills Developments (PHDC EY) to set up a higher education university in West Cairo, pending regulatory approvals, with a potential capacity of 9,160 students controlled and managed by Taaleem. CI Capital influences the decisions of Taaleem’s board of directors. We value Taaleem at an equity value of EGP4.42bn, implying EGP728m for CI Capital’s share.” Monette Doss added.

“Seeking expansion in NBFS, Banque Misr submits an MTO for up to 90% of CI Capital at EGP4.70/share: Banque Misr has submitted a mandatory tender offer (MTO), approved by Egypt’s Financial Regulatory Authority (FRA), to acquire up to a 90% stake in CI Capital at EGP4.70/share, seeking a minimum stake of 51% of the total company’s shares, while reserving its right to execute a lower number of shares, if it chooses to, according to the MTO circular published on Friday. The offer will run from today and until the end of the 11 March trading session. Banque Misr intends to keep the minimum regulatory free float requirement of 10% of its shares to maintain its listing on the EGX. Currently, the bank owns a 24.7% stake in CI Capital, while the acquisition will increase its exposure to the highly profitable NBFS sector, in our view. We believe the transaction could result in significant synergies between the two entities, including providing cheaper funding to CI Capital’s NBFS operations and benefiting investment banking operations.” Monette Doss continued.

HC’s head of macro and financials concluded: “We increase our 12M TP for CI Capital by c19% to EGP5.47/share, largely on lower COE, and maintain our Overweight rating: We value the company using a Sum-of-the-part (SOTP) methodology, and use an excess return model for its core operations, valuing its consumer finance and mortgage greenfield investments at equity book value. We value its financial investment in Palm Hills Developments at a market value of EGP141m and use a DCF methodology to value Taaleem applying a beta of 1.00. We decrease our cost of equity to an average of 16.7% from 17.5% previously, on a lower-than-previously expected risk-free rate. Individually, we value CI Capital’s Corplease at EGP2.42/share (c17% higher than our previous estimate), putting the business at a 2021e P/E multiple of 7.3x. For microfinance, we value Reefy at EGP1.15/share (c28% higher than our previous estimate), putting the business at a 2021e P/E multiple of 8.70x. We value the investment bank at EGP0.91/share (c1% lower than our previous estimate). We add the equity book value of its mortgage and consumer finance greenfield investments and its financial investment in Palm Hills Developments of EGP0.26/share. We value Taaleem at EGP0.73/share (c3% higher than our previous estimate), putting the business at 2021e EV/EBITDA of 11.1x, 2.11x its acquisition value. The NBFS platform makes up c65% of the stock’s total equity value, the investment bank c17%, Taaleem c13%, with equity investments accounting for the remaining c5%. These sum up to a 12-month target price of EGP5.47/share, implying a potential return of c20% on the 11 February closing price of EGP4.54/share. We, therefore, maintain our Overweight rating on CI Capital. Our 12-month TP of EGP5.47/share puts the stock at a 2021e P/E multiple of 9.77x and a P/B multiple of 1.51x, while it is trading at 2021e P/E and P/B multiples of 8.12x and 1.26x, respectively.”

HC Brokerage stepped in 2021 with a new branch in Alexandria

Posted on by Marwa Nakhla

  • HC Brokerage stepped in 2021 with a new branch in Alexandria. Hassan Choucri: “Our expansion plan aims at providing services to retail in light of the high potential for investment growth in the stock market.”

HC Brokerage launched its new branch in Alexandria, to provide various services in the fields of securities trading, and online trading to the potential investors of this active governorate and the surrounding areas, after obtaining the necessary licenses from the Financial Regulatory Authority, to reach eight branches across the two capitals, Delta and Upper Egypt.

The opening of the new branch comes within the framework of the company’s commitment to being present in uncovered areas who do not have access to investment services and financial advisories throughout the country. HC targets promising areas in terms of investment opportunities and appetite. The past period, particularly during the coronavirus outbreak, proved that these expansions led to great successes across Upper Egypt and the Delta region.

Hassan Choucri, Managing Director of HC Brokerage, said that the opening of the Alexandria branch is a continuation of the company’s efforts to expand in the governorates of Egypt, especially the Delta region. The Egyptian stock market witnessed a significant number of retail investors who acquired a significant share of trading volumes. Due to this current market trend, in addition to the company’s positive outlook for 2021 performance, the decision to offer much needed retail financial services proved feasible in the presence of latent opportunities for investment growth.

He added: “The company plans to add other governorates to the bundle of branches of HC Brokerage in the Delta and Upper Egypt, we are encouraged by the expected improvement in the Egyptian economy’s performance in 2021 and thus the performance of the capital market, despite the crisis of the coronavirus outbreak. We are also encouraged by the pay-off of our efforts.” HC tripled its market share in the retail sector from 0.5% at the end of 2015 to reach 1.5% at the end of 2020, and the company has also jumped from the 55th rank by retail trading volume to the 19th over the same period.”

Choucri stressed that the Egyptian capital market is expected to receive greater interest from foreign investors in 2021, whether in Egyptian treasuries – as their real returns are attractive compared to other markets – or in stocks. With regards to stocks, the pricing declines witnessed in the Egyptian capital market remained greater than other markets. Moreover, it is expected that the Egyptian economy will be the only economy in the region that will record growth, according to the estimation of many international entities, including the World Bank.

 

HC Perceives upward interest rate pressures, CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 4th and based on Egypt’s current situation, they Perceive upward interest rate pressures and expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We expect January inflation to come in at 5.2%, near the lower end of the CBE’s new target range of 7% (+/-2%) for 4Q22. We, however, perceive upward interest rate pressures as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions. In this regard, we note that Egyptian treasuries are now facing higher competition from Turkey which increased its policy rates by 200 bps on 24 December, taking its 15M treasuries to 15.97% up from an implied rate of 10.66% previously. Given Bloomberg estimates for 2021 inflation in Turkey at 12.2%, the Turkish treasuries now offer 3.8% real return similar to Egypt’s real return of 3.8% (given Egypt’s 12M yields at 12.99%, 15% tax rate for American and European investors and our 2021e inflation forecast of 7.2%). On a different front, banking sector liquidity, as indicated by the CBE’s deposit auctions, declined to represent c11% of total local currency deposits in November from c13% in October. We also believe that currently, the high-risk business environment poses upward interest rate pressures. Even though the Egyptian economy has shown high resilience in absorbing the repercussions of the pandemic, global uncertainty had its toll on different sectors in Egypt especially tourism and export-related sectors increasing their risk and also posing interest rate pressures, in our view. That said, we expect the MPC to keep rates unchanged in its upcoming meeting on 4 February.”

 

It is worth mentioning that, in its last meeting on 24 December, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged after undertaking cuts of 50 bps twice in its September and November meetings. Egypt’s annual headline inflation decelerated to 5.4% in December from 5.7% in the previous month, with monthly inflation decreasing 0.4% m-o-m compared to an increase of 0.8% m-o-m in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC’s Head of Equity Research Nemat Choucri, shares her views

Posted on by Marwa Nakhla

HC’s Head of Equity Research Nemat Choucri, shares her views about the economic sectors in Egypt

  • Tourism sector

We don’t expect a recovery in tourism before 2H21 until COVID-19 vaccinations become more available to the general public in Egypt and abroad, and accordingly we don’t expect a recovery in tourism to pre-COVID-19 levels to take place in 2021

  • Stock market

We expect a rebound in the Egyptian stock market activity in 2021 in light of the rolling out of COVID-19 vaccinations, currently prevailing low interest rates (a total of 400 bps policy rate cuts in 2020), compelling valuations, increased participation of retail investors, and the Egyptian government’s efforts and initiatives to support local industries and attract private local and foreign investments

Foreign holdings in Egyptian treasuries recovered to USD23bn in November, after it fell by USD14bn in March, when COVID-19 was announced as a pandemic, from a level of USD28bn in February. We expect Egyptian equities to also attract foreign portfolio investments in 2021 especially that the market is currently oversold (down c24% y-t-d), and foreigners were net sellers in 1Q20, 2Q20 and 3Q20

  • Foreign direct investments (FDIs)

FDIs have significant room for growth as it fell by c10% y-o-y in FY19/20 to USD7.5bn, and by c11% y-o-y in 4Q19/20 to USD1.52bn. We expect the Egyptian government’s recent efforts including lowering interest rates, the new customs law, the unified tax law and the amendments to the investment law to bear fruit and attract significant FDIs

We also expect the said efforts, in addition to the government’s recent initiatives to support local industries and an expected cut in natural gas prices to industrial users to also stimulate private local investments

Consumer spending positively affected by the declining unemployment, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 24th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We believe December inflation figures could accelerate further to 6.1% y-o-y and 0.2% m-o-m possibly correcting for November price increases resulting from supply shocks of some vegetables. However, inflation would still remain within the CBE’s target of 9% (+/- 3%) for 4Q20. We believe that declining unemployment levels to 7.3% in 3Q20 from 9.6% in the previous quarter has reflected positively on consumer spending recently. We also believe that the relative improvement in investor confidence together with monetary easing started to bear fruit as indicated by Egypt’s Purchasing Manager Index (PMI) exceeding the 50 benchmark in September, October and November, coming in at 50.4, 51.4 and 50.9, respectively. Given our December inflation forecast, real interest rate on short-term deposits and loans is estimated at c2% and c4%, respectively, significantly higher than their historical 12-year average of c-3% and c1%. On a different front, we expect foreign inflows into Egyptian treasuries to slow down over the coming months due to possible diversion of funds towards recovering emerging markets’ stocks this is beside possible outflows due to profit taking in December. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.03% (based on 1-year T-bill rate of 13.0%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a relatively better risk profile with its 5-year foreign currency CDS at 353 currently, compared to 378 for Turkey. That said, we believe the CBE has room for another 100 bps rate cut that we expect to take place in 1Q21, while we expect it to hold rates unchanged in its upcoming December meeting, since we expect markets to show muted response to an interest rate change during the holiday season.”

It is worth mentioning that, in its last meeting on 12 November, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps for the second consecutive month after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month, with monthly inflation increasing 0.8% compared to an increase of 1.8% m-o-m, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC comments on Egypt’s balance of payment (BOP): It recorded a deficit of USD3.47bn

Posted on by Marwa Nakhla

Egypt’s balance of payment (BOP) recorded a deficit of USD3.47bn in 4Q19/20, reversing a surplus of USD0.25bn a year earlier, with the current account deficit widening to USD3.83bn in 4Q19/20 from a deficit of USD1.09bn a year earlier, data from the Central Bank of Egypt (CBE) showed. The trade balance deficit slightly widened to USD8.41bn from a deficit of USD8.29bn in 4Q18/19. Egypt’s travel receipts fell c90% y-o-y to USD0.31bn leading to a total services balance surplus of USD0.55bn, down from a surplus of USD3.28bn in 4Q19/18. Worker remittances also declined c11% y-o-y to USD6.16bn, and FDI also fell c11% y-o-y to USD1.52bn. Portfolio inflows in Egypt amounted to USD0.64bn in 4Q19/20, of which net bond inflows amounted to USD3.74bn, offsetting the outflows from the shorter-term portfolio investments, the data showed. (CBE)

HC’s comment: The impact of the coronavirus on Egypt’s external position came in largely as expected, with the exception of the trade balance deficit which came in significantly wider than our estimate of USD5.59bn, as imports of non-petroleum products remained flat y-o-y at USD13.02bn, c36% above our estimate of USD8.38bn. The services balance came in better than our estimated deficit of USD0.79bn due to lower than expected services payments. Worker remittances came in c5% above our estimate of USD5.85bn. The current account balance figure was largely in line with our estimate of USD4.25bn. FDIs came in largely in line with our estimate of USD1.03bn.

Investing In StartUp’s Post Coronavirus

Posted on by Marwa Nakhla

  • Consider your approach to investing in startups before the coronavirus pandemic and consider your strategy now. If you’re taking the same investment strategy, then you know things need to change. The world has changed and the way you invest in startups needs to change also. From an investment standpoint, everything you do should be based on leading the competition. Here are a few strategies and new norms that you should consider to be integral to your new investment strategy and startup philosophy.

 

  • Remote Sales Reps Vs In-house Sales Teams

Sales is the most critical aspect of a company. Some would argue that a startups business process and management team are equally important. However, a recent study concluded that most executives feel customer acquisition and sales strategies are the most important reason why they would invest in a startup. Therefore, adapting your sales strategy to be remote and extremely cost-efficient is a great selling point for both investors and startup founders looking to save money and operate in the new coronavirus landscape.

Think about it. Those startups and even enterprise organizations that successfully leverage remote sales reps over in-house sales consultants will win at the end of the day. They will win in both cost efficiency, agility, adaptability, and longevity. Startups that make sales a remote ordeal, and do it successfully have been known to achieve higher revenues.

A study by 99 Firms concluded that 75% of buyers prefer not to waste time meeting face to face. Why waste time meeting in person when you can conduct a transaction remotely. If buyers and prospects are already accustomed to doing business online and over the phone, it only makes sense that any startup you operate or invest in takes advantage of that.

  • Food & Technology are Recession-Proof

When looking into recession-proof investment options, food & technology always win. If it’s two things that industry analysts around the globe agree on, it’s that the consumer packaged foods industry and tech-based innovations will never be struck too hard by any recession or pandemic. People always have to eat and the world craves new innovation.

The term recession-resistant has been used quite frequently when discussing consumer packaged goods. Our society uses these food items and beverages every day. Take a look around your kitchen and you’ll find a wealth of consumer packaged goods that you consider to be essential. Even in the middle of a pandemic, you’ll still need to buy salt, water, eggs, oatmeal, and a whole host of other consumer packaged food items.

Now let’s talk about technology. You can’t read this article, watch the news, or even buy anything without some form of technology. The world operates at a foundational level with the help of integrated technological devices like smartphones, payment processing platforms, databases, etc. These are tech-based innovations that never go into a recession. Consider this as an investor when trying to keep a healthy portfolio during the coronavirus pandemic.

  • The Lean Startup Model Is Now More Important Than Ever

Harvard business school has coined the term, “The Lean Startup”. It refers to startups and businesses that look at things from an agile and lean perspective. Before dedicating your time, resources, and energy to assuming what the customer wants, get out and ask them directly. Get out and make contact with your customers by asking them, is this solution something you can use, how much would you pay for it, and questions like these. This is more important than ever in a time like the coronavirus pandemic.

Modern business trends and customer’s buying behaviors have forever changed. Therefore, startups that maintain a lean and agile philosophy will be more successful than those that don’t. Whether you are an investor or startup executive, keeping this in mind is critical.

The basic philosophy behind staying lean is never assuming you know what the customer wants. Asking them directly will help you pivot and adapt in the right direction. Take for example a company like McKinsey & Company. They are constantly adapting to the evolving marketplace and innovating new services based on what customers want. It’s one of the reasons why they are the largest consulting firms in the world. Things change every day and unless you ask the customer, how would you know?

Based on our experience and diverse investment portfolio, these are the most important aspects of business startups and investment strategies that need to be considered in this new coronavirus landscape. Don’t hesitate to reach out to our team of expert investment strategists. We’re ready to help you gain a foothold in a pandemic resistant sector.

HC: GB Auto Profitability should be back on track 3Q20

Posted on by Marwa Nakhla

In a recent report, HC Brokerage shared their valuation of GB Auto updating the market on the auto/auto related business. HC maintains their OW rating on compelling valuation.

  • Auto and auto related operations are gaining traction on improved market dynamics and GB Auto presence; auto business to revert to profits this year, on our numbers

  • We forecast GB Capital to continue delivering solid earnings growth and impressive NIMs, filtering through to a 4-year bottom line CAGR of c11%

  • We slightly cut our 12M TP c3% to EGP5.13/share on lower GB Capital valuation, but maintain our OW rating on compelling valuation

Noha Baraka, the head of consumers at HC commented that: “Back on track: The auto and auto related business had been loss-making for almost 8 consecutive quarters. This was mainly driven by a series of events significantly hurting Egypt’s automotive sector. Starting primarily with the delayed availability of foreign currency in 2015, then the EGP floatation, moving to the fierce competition and price wars following the alleviation of import tariffs on European cars, then the “Let It Rust” campaign, and most recently the coronavirus outbreak. However, recent market numbers suggest an improvement since the government lifted some of its precautionary measures leading to the resumption of the licensing and registration of cars, and a c26% y-o-y increase in 3Q20 local passenger car sales volume. Accordingly, we expect a marginal improvement in sales in 4Q20 to reach c43,800 cars, a c9% y-o-y increase, as consumer demand is likely to remain depressed in the short term. Going forward, we expect the PC market to gradually recover and grow at a 4-year CAGR of c10% aided by pent-up demand, lack of public transportation and infrastructure, and not to mention the increased momentum coming from falling interest rates and stable FX rates. We are now more bullish on GB Auto’s outlook given its new launches of more competitive CKD models such as the Chery Arizzo and the Hyundai Accent RB to recoup some of the lost Verna sales, and the introduction of new CBU models such as the Hyundai CN7, along with a focus on high-end cars such as Tuscon, not to mention discontinuing all loss making models. This should be enough for the company to regain some of its lost market share and most importantly partially restore its profitability, despite fierce competition, in our view. We expect GB Auto PC volumes to grow at a 2020–24e CAGR of c13%, implying a terminal market share of 20.8% by 2024e from 16.5% in 2Q20. Similarly, the 3-wheeler business has begun to gain traction once again after being severely hit on a series of new licensing limitations, thanks to strong market dynamics, while the 2-wheelers has continued to show strong performance especially after its cut in prices, which allowed GB Auto to capture some market share gains. We expect volumes to grow at a 2020–24e CAGR of c14% fueled by a robust underlying demand. However, the main challenge will be coming from the regional PC business, in our view, in light of the company’s decision of liquidating its Hyundai brand in Iraq, pushing the remaining 1,700 kit this year, which will weigh on the auto business’ top line. Accordingly, GB Auto announced that it has secured its representation in Iraq through launching MG brand (which is of a higher margin compared with Hyundai), starting with only 250 kits on a monthly basis to assess the market perception of the new brand. Therefore, we opt to be conservative and assume the new MG brand representation in Iraq to stand at 500 cars in 2020 and 3,000 cars in 2021, before growing at a 2021 –24e CAGR of c3%, on average. Thus, our numbers point to auto and auto related 2020–24e revenue CAGR of c13%, some c28% lower than our previous estimates, dragged down by lower regional PCs operations, and to a lower extent due to lower local PC market share for GB Auto.”

“The impact on profitability is more profound with 3Q20 witnessing profits generation: As far as margins are concerned, we expect continued portfolio optimization through the rolling out of new models, in addition to a stronger EGP/USD rate should help the company defend its high margins in the short term. We see auto and auto related business’ gross profit margin expanding 2.9 pp to reach 13.1% in 2020e, however, we believe these high margin levels are unlikely to be sustained over the long-run, reflecting the intensified competition that GB Auto is facing, especially in the PC business. Therefore, we forecast the terminal gross profit margin for the auto and auto related business to stand at 12.3%, still 2.5 pp higher than our previous estimates. We expect the business EBITDA margin to increase to 7.7% in 2020e, from 5.5% in 2019, before normalizing at an average of 5.3% over our forecast period on the back of high SG&A expenses, and as 2Q20 EBITDA was partially inflated by the sale of a land plot. We also see the line of business benefiting from declining interest rates, given its highly leveraged nature, and forecast a c48% cut in 2020–23e interest charges bill. We now expect the auto and auto related business to realize profits starting 3Q20, and be value accretive, removing an overhang on GB Auto’s operations.” Noha Baraka added.

Noha continued: “GB Capital to continue to shield overall company’s profitability: GB Capital has continued to be the company’s star performer despite the pandemic, expanding its EBIT by c21% y-o-y in 1H20, and its loan portfolio by c14% from the end of last year to EGP10.1bn, with NPLs remaining in check at 1.5%. We expect loan portfolio to grow another c10% to reach EGP11.1bn by year end and we do not rule out securitization taking place in 4Q20. We believe GB Capital will continue to deliver solid earnings growth and impressive NIMs until 2021e, despite the cut in interest rates, thanks to its asset/liability duration mismatch through lending at fixed interest rates while borrowing at variable ones, along with the company’s efforts to get preferential rates from banks. Post 2021e, we expect to see the increased competition to cool off NIMs by 1.8 pp to stand at 16.3% by 2024e and largely stabilize at these levels. Accordingly, we expect the business bottom line to grow at a 2020–24e CAGR of c11%, c5% lower than our previous net income estimate, mainly on the back of lower loan portfolio growth and higher provision expenses. More securitization taking place should bolster earnings growth, in our view.”

“Maintain Overweight on compelling valuation: We raise our valuation for auto and auto related business c57% to EGP0.93/share, mainly on the back of our new estimates, lower working capital needs fueled by stronger EGP/USD rate, in addition to using a lower average cost of capital (13.9% versus 14.9% previously). Our valuation of EGP0.93/share puts auto and auto related business at a 2021e EV/EBITDA multiple of 4.8x and an EV/IC of 1.1x. As for GB Capital, we continue to value the business separately, yielding EGP4.20/share, slightly lower from our previous valuation of EGP4.71/share, based on equally weighted global 2021e peers’ average P/B and P/E multiples of 0.9x and 9.3x, respectively, using our 2021e net profit figure of EGP693m. Our 12-month target price of EGP5.13/share implies a potential return of c89% over the 4 November closing price of EGP2.71/share. We therefore maintain our Overweight rating. In our view, the valuation remains compelling, with the stock trading at a 2021e P/E multiple of 3.5x, a c76% discount to its peers’ implied multiple of 14.8x. GB Auto investment case is gaining traction capitalizing on GB Capital’s ongoing solid performance, in addition to a turnaround in the auto and auto related business, lowering the pressure on the group’s balance sheet and hence creating some room for FCF generation, in our view. This should be enough to lift the overhang on the stock performance given that for at least the last year the market has not been assigning any value for the auto business, and has even undermined the value of the group’s financing arm. The long-awaited automotive directive could add further upside to our auto and auto related business numbers, if it goes through.” Noha Baraka concluded.