• Recurring earnings down 15% Y-o-Y on higher interest costs GB Auto posted 1Q16 results, with headline earnings down 45% Y-o-Y to cEGP28.6mn, dragged down by EGP73mn in FX losses and provisions (versus cEGP63mn a year ago). Recurring earnings were down 15% Y-o-Y (-25% vs EFGe), mainly on higher net interest costs (+36% Y-o-Y). Despite the continued trend of operational growth not filtering through to earnings, we are encouraged by strong market share gains in Egypt passenger cars (in an environment of EGP devaluation and FX shortages) that are likely to continue, aided by the launch of new models. We reiterate our Buy rating, with the stock trading at low multiples: 2016 P/E of c6x and P/B of c0.7x.
• Top-line beats estimate, mainly on strong Egypt car market share gains Revenue fell 9% Y-o-Y, but was 8% above our estimate as: i) Egypt car revenue (c48% of 1Q16 top-line) was up 3% Y-o-Y, mainly on market share gains (+6.1pp Y-o-Y to 33.9%; 39.3% in March aided by launch of Chery) and higher prices; ii) financing businesses (c12%) were the best performers with revenue growth of 50% Y-o-Y and bottom-line +32% (a third of recurring earnings); and iii) after-sale (c6%) and tires (c4%) performed strongly (+20% and +33% respectively). On the other hand, two- & three- wheelers (c16%) continued to decline for the second quarter (-8% Y-o-Y) on FX shortages. Commercial vehicles (c10%) also saw revenue fall 43% Y-o-Y from a high-base, while Iraq (c6%) remains challenged, with volumes down 72% Y-o-Y.
• Margins improve on price increases Gross margin widened c3.1pp Y-o-Y to 17.1%, mainly on price increases across all of Egypt’s core divisions. Accordingly, gross profit was up 11% and in line with our estimate despite the revenue beat mainly on weaker-than-expected margin gains at Egypt passenger cars and commercial vehicles. Meanwhile, EBITDA margin improved a tamer c1.7pp to 10.2% as SG&A costs were up 14%; EBITDA grew 10% (-1% vs EFGe). The margin improvement is effectively higher than what the numbers show as the company now reports the differential between the official and black market rates in CoGS instead of FX losses (now only reflect repricing of FC liabilities).

Hatem Alaa, CFA
Nada Amin