3Q09 Results: Commercial Vehicles Disappoint
GB Auto’s net income came in 20% below HC’s expectations mainly on the back of the weak performance of the Commercial Vehicle (CV) LoB, due to overhead under-recovery caused by bus facility relocation and lost sales as a result of a truck model change.
HC is concerned about CV margin pressures, which are expected to continue until 2Q10, in addition to the unforeseen near-term commencement of the draw-bar trailer replacement program.
HC reduces the target price for GB Auto by 7% to EGP28.7/share and maintain a “Hold” recommendation.
Cairo, November 23, 2009: GB Auto’s 3Q09 net income came in at EGP64 million, down 64% YoY from EGP176 million (restated), but recovering a strong 59% QoQ from EGP40 million. This is, however, 20% below HC’s estimate of EGP79 million, partly due to a higher-than-expected tax expense, but more significantly because of weak performance of the Commercial Vehicle (CV) LoB. Revenue came in at EGP1.2 billion, 10% below HC’s estimate of EGP1.4 billion but advancing 14% QoQ, indicating that the passenger car market recovery is intact, aided by the government-sponsored taxi replacement program. More importantly, margins picked up this quarter, with a gross margin of 13.5% (versus 12.0% in 2Q09) and an EBITDA margin of 10.2% (versus 8.2% in 2Q09), but were hampered by CV losses.
CV revenues were the negative surprise to HC’s estimates, coming in 66% below HC’s numbers on the back of lost sales due to a once-every-12-year model change on Mitsubishi Canter trucks, leaving the model out of stock. Additionally, CV performance was exacerbated this quarter by losses due to the relocation of GB Auto’s bus-body assembly facility from Qaliyoub to Suez (the site of the GB Polo joint venture assembly plant) leading to an under-recovery of factory overheads. Margins are expected to remain impaired until GB Polo officially begins in 2Q10 (delayed from 4Q09), affected by under-recovered overheads as well as price concessions to reduce high-cost inventory in this segment. HC is also concerned about the repeated delays of the government-sponsored trailer replacement program, and therefore HC excludes GB Auto’s trailer sales to the program from HC’s estimates until its timeframe becomes clear. Accordingly, HC lowered its revenue, EBITDA and net income estimates by an average of 35%, 12% and 19%, respectively, over HC’s forecast horizon. HC also lowered its 2009e CAPEX by 26% as the company paces investments in its service centers amid current market conditions.
Hence, HC reduces its price target for GB Auto by 7% to EGP28.7 per share, which implies an upside of 17%, and maintain a “Hold” recommendation on the stock. Catalysts heading into 2010 include: a new brand representation on the passenger car front, (ii) a new tire representation on top of the current Lassa brand, (iii) export agreements, (iv) an anticipated commencement of the belated draw-bar trailer replacement program, (v) GB Auto's participation in a government-sponsored micro-bus replacement program with total expected replacements of 65,000 microbuses, and an anticipated market share of 25% for GB Auto, and (vi) higher-than-expected two- and three-wheelers sales volumes aided by GB Auto’s new microfinance venture announced last October.
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© Press Release 2009
