• Reiterate Buy on deep value after share price underperformance We cut our FV 14% to EGP4.3/share mainly as we raise our CoE by c150bps. We remain Buyers (our new FV implies significant 71% upside) as we believe the stock offers deep value after significantly underperforming YTD (-c32%) trading at c20% discount to tangible book value and at c6x 2016e earnings. Despite the validity of FX concerns (c75% of CoGS in foreign currency), 2016 is gearing up to be an operationally strong year for GB Auto given pricing flexibility and the success of new car models.
• Expect Egypt car division to see strong market share, margin gains... Despite recent EGP devaluation and currency shortages that are pressuring passenger car market volumes (on a downtrend for seven months; expect -10% Y-o-Y for 2016e), GB Auto’s car division is performing fairly strongly (impressive c14% gross margin in 4Q15 to sustain at least through 1Q16) on: Significant price increases since October 2015 (15-20%) Market share gains (+c8pp in 2016e) on better ability to import compared to other players, successful launch of several new Hyundai models (Tucson, Creta & Solaris) and adding Chery to its car brands Recently increasing the number of assembled models to five from three previously with the introduction of the locally assembled Hyundai Elantra as well as the Chery Envy and Tigo
• …but headline earnings are likely to remain volatile in the short term However, we expect reported earnings to remain volatile on: i) FX losses (c17% of net debt and bulk of cEGP1.3bn payables in FC); ii) rising interest rates given high leverage (1.1x net debt/tangible equity, 30%+ of leverage relates to its financing arm); and iii) the loss-making Iraqi business for which we still assign no value given limited visibility. We also exclude the planned tire project from our numbers until an agreement with project partners is finalised. Upside risks include passage of the long-awaited automotive directive that will aim to increase incentives offered to local assemblers and stronger performance at financing (40%+ of 2015 headline earnings) and other high-margin divisions.

Hatem Alaa, CFA
Nada Amin