Egypt currently has a number of detractors, keen to herald a dark outlook, often inspired by the uncertain scenario that could unfold after the passing of President Hosni Mubarak, who has served in this role for most of his life. At Silk Invest we don’t engage in political debate but what we do believe is that these concerns are rather ‘passe’ as the worst outcome surrounding a succession is probably already priced into the market at current levels. How can it not be? The topic has been in the public domain for some time now and it even recently made the cover of leading economic magazine.
As is habitual, every week we highlight an example of a company or trend that caught our attention. We pick out the stories that , in our opinion, are the best testimonials of the vibrant growth and activity that makes up for the reason why more and more people are interested in the frontier markets: Investors seek growth and this is where it can be found in its purest form. The good news is that there are many of these stories to choose from. What’s even better, it allows for the construction of portfolios made up out of a diversified amount of investments in solid growth opportunities. The trick lies in identifying the opportunity and understanding it’s potential from a local perspective.
Automobile retailing could well be considered as a good gauge to measure the strength and the trajectory of a where a consumer market is headed. Arguably, when we look back at past crises, the first symptoms of economic trouble could be detected in the automobile industry. When more people are buying cars, it says something about that fact that consumer confidence could be in good shape.
GB Auto (Ghabbour), formerly GB Capital for Trading and Capital Lease, is an Egypt-based company that makes its money by producing, trading, distributing of transportation vehicles. It is active across the full product spectrum, including heavy trucks, passenger cars, motorbikes, buses, pick-ups, construction and handling equipment, and agricultural tractors. It is also engaged in the import and sale of tires, spare parts and accessories of mechanical tools, equipments and cars, as well as the operation of chain of service and maintenance centers. Ghabbour’s main business partners include Hyundai Motors, Volvo Group, Mitsubishi Fuso, Bajaj, Lassa and Monroe Shocks.
In the second quarter of 2010, GB Auto continued to perform strongly and has exceeded expectations. These results confirm that the Egyptian passenger car market is vibrant, and has significantly risen from 2009 levels and is well on track to recovering back to the levels seen in 2008.
GB Auto’s latest business ventures including GK Auto and a representation of Mazda are beginning to bear fruit, and will be an additional support factor for higher revenues going forward. 2010 second quarter’s net profit grew by a staggering 93% year-on-year to EGP 78 million. Total revenue came at EGP 1.7 billion, up by 62% year-on-year and 31% over the quarterly period. The successful launch of the Mazda representation in June, a higher revenue from commercial vehicles and two and three wheelers were the main reasons for the increase. GB Auto also sells vehicles in Iraq, where it saw considerable growth in sales volumes.
Egypt’s Hyundai passenger car sales performance was as strong as during the first quarter of 2010 and despite competitive pressures, GB Auto’s Hyundai passenger car market share was just above its historical average of 26-27% at 28% for the first half of 2010 versus an exceptionally depressed 24% over the same period in 2009.
GB Auto’s Total Passenger car sales grew by 82.4% to EGP 1.3 billion on the back of strong sales in both Egypt and Iraq. Sales also rose by nearly 14% for GB Auto’s commercial vehicles business line, for the second quarter of 2010, on the back of returning demand from the corporate sector. Furthermore, the company reported a slight recovery in demand from the tourist-industry. The two and three wheelers’ segment continued to perform well, with a sales growth of 37% despite emerging competition. The latter is the segment to watch in order to get a feel for the bulk of today’s vehicle consumer appetite. This is an arising consumer society in which most still cannot afford a car and that is precisely where the long-term opportunity lies, GB Auto can grow its business in line with this future demand.
Despite these good results, GB Auto reported a much higher-than-expected net interest expense of around EGP49 million. This translated into an increase of 29% year-on-year and 46% for the quarterly period; this is mostly due to the impact of the recently raised EGP1 billion bond. In April 2009 the GB Auto issued EGP 1 billion in unsecured bonds. At issue, the 3 year transaction was oversubscribed and fully allocated with an interest rate of 12%. The bonds were sold at par and have traded up well since launch, reaching a high this week at 104.5, largely on the back of the impressive second quarter financial results.
GB Auto is expected to maintain its market share at the 28-27% level, supported by more replacement of the taxi car pool and the introduction of new models in 2011. Now that GB Auto also distributes Mazda, the brand is expected to capture 1% share of 2011 car sales.
What we also found interesting is that GB Auto’s management has indicated that it is targeting more regional markets, namely Africa, for potential acquisitions. The company is currently executing a strategy to expand its presence in the Iraqi market, especially by increasing its offer of microbuses and pickup trucks. They are trying to replicate the success formula that worked for Egypt, where these types of vehicles currently comprise the majority of GB Auto’s commercial vehicle sales.
GB Auto is also working on the enlarging its consumer credit facilities in collaboration with local banks, in order to launch lease financing services. It has recently also even launched a microfinance facility.
Last but not least, GB Auto is currently in advanced negotiations with Tata Motors of India, where as the negotiations are not only related to the passenger cars line of business, but also commercial vehicles.
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