GB Auto’s history began in the 1940s when Sadek and Kamal Ghabbour started a family trading business with activities in automotive-related products, construction materials, home appliances, and electronics. Following the 1970s open-door policy, Ghabbour Brothers secured licensing deals from global suppliers
AUTO operates two main segments. First is the automotive sector (including six lines of business passenger cars, commercial vehicles and construction equipment, motorcycles and three-wheelers, tires, after-sales, Iraqi operations). The second is financing.
While about 75 percent of sales volume in the first half of 2019 derives from Hyundai vehicles, GB Auto also sells Mazda, Geely, Chery, and Karry models. The company’s portfolio includes imported as well as locally-assembled models at GB’s facilities in Egypt.
Another part of the portfolio includes Bajaj, Marcopolo, Iveco, Volvo trucks, buses, and construction equipment in addition to Mitsubishi Fuso, YTO, and Pirelli, along with other brands.
GB Auto entered the underserved Iraqi market ten years ago. Through a 50-50 joint venture with a local partner distributing Hyundai cars, it has managed to capture a 25 percent market share as of June 2019.
Back in 2008, AUTO moved strategically to set up its financing arm, GB Capital. It supervises non-bank financial services operations— a growing sector in Egypt.
Through its subsidiaries, the company offers leasing, consumer finance, microfinance, and fleet quasi-operational leasing under different brands, namely GB Lease, Mashroey, Drive, Tasaheel, and Haram.
The core automotive business
When investors think of GB Auto, they understandably focus on the automotive industry with all its revenue drivers and risks. While vehicle sales are still considered the core segment within GB Auto, it’s no longer the sole bread-and-butter for the company. Indeed, the automotive sector generated revenues of EGP9.27 billion in the first half of 2019, representing around 80% of the company’s total revenue but less than 60% of the company’s gross profit.
AUTO’s vehicle arm reported a gross profit of EGP1.01 billion or 10.5% gross profit margin. After accounting for expenses, GB reported an operating profit of just EGP 326 million. A 3.4% operating margin is not large enough to accommodate the segment’s finance expenses of EGP 712 million on a debt load of EGP 7.0 billion explaining EGP 283.4 million in net losses in AUTO’s core business reported in the first half of 2019.
While its high leverage and a shallow interest coverage ratio are to blame vehicle sales woes, two other factors ate into profitability margins.
On the one hand, the lifting of import tariffs on European cars increased competition, with a flood of competitively priced imported supply arriving in the market. A populist “let it rust” consumer boycott dampened Egyptian car sales last year, leading GB Auto to cut prices to match competition and stimulate demand.
Over the last five years, average annual passenger car sales in Egypt were just less than 160,000, yet implying a negative compounded yearly growth rate of 8%. The market reached a trough back in 2017 when total market sales volume was shy of 100,000 before it recovered to about 145,000 in 2018. However, overall market sales volume is expected to drop by around 30% in 2019 to approximately 105,000, driven mostly by the “let it rust” car boycott.
This campaign has served as a drag on the automotive industry, but it also indicates some pent-up demand that will eventually have to be satisfied. Investors will need to see how much GB Auto will capture of that pie.
The motorcycle and three-wheeler sub-segment saw revenues fall by 34% year-on-year to EGP1.02 billion in the first half of 2019, caused mainly by a slowdown for three-wheelers after the government set monthly limits on new licenses.
Nonetheless, demand for tuk-tuk is still robust. GB Auto’s management calls this segment “very strategic” because it provides tens of millions of Egyptians employment and alternative transportation in otherwise inaccessible neighborhoods.
Financing the future
The non-bank financial services segment –known as GB Capital–generated revenues of EGP2.27 billion in the first half of 2019. That represents around 20% of the company’s total revenue but more than 40% of the company’s gross profit. The segment reported a gross profit of EGP722 million or 30.6% gross profit margin.
After accounting for selling, general, and administrative expenses and other operating expenses, the automotive segment reported an operating profit of EGP408 million, a 17% operating margin and 25% higher than that of the automotive segment. GB Capital generated net earnings of EGP288 million, as opposed to a net loss of EGP283 million from the automotive segments all combined.
The GB Capital line of business is home to five different subsidiaries, each catering to specific sub-segments of the NBFS spectrum. For instance, GB Lease provides business-to-business financial leasing solutions, financing assets that include real estate, automotive, and production lines.
Mashroey offers asset-based microfinance lending, mostly short-term, to clients to purchase motorcycles, three-wheelers, tractors, and motor tricycles. Drive provides factoring services to a diversified client base, ranging from business-to-business (B2B) and business-to-consumer (B2C), with a focus on the auto finance sector. Haram Tourism Transport provides car rental services on a quasi-operational lease basis.
The social-entrepreneurial Tasaheel microfinance company focuses on direct lending to clients, predominantly lending to women, to help low-income earners generate higher incomes and improve their living standards.
The forward-looking decision made around ten years ago to penetrate the Iraqi market is paying off today. According to GB Auto’s management, demand in Iraq has surpassed its most bullish expectations in the second quarter of 2019.
No wonder total revenues from regional activities more than doubled year-on-year to EGP1.78 billion. Also, in the first half of 2019, total regional revenues jumped 119% year-on-year to EGP3.37 billion, representing 36% of total revenues and 27% of total gross profit of the automotive segment.
This explains why GB Auto’s management could be eyeing regional expansion in promising, yet underpenetrated markets. As for Iraq, their strategy is to accelerate volume growth in the market and expand its after-sales network.
After the Egyptian automotive industry slowed in the first half of 2019, GB Auto’s management opted to build out its diversified operations, proactively adjust its passenger car portfolio and prepare to capture pent-up growth in the three-wheeler sub-segment. Given the cyclical nature of the automotive industry, GB Capital will likely continue to be the critical driver for AUTO’s performance in the foreseeable future.
