A recent report issued by Pharos Research expects Ghabbour Auto (GB Auto)'s net debt to hit EGP 4.34bn by the end of 2018, as the Egyptian car manufacturer is likely to suffer from a slowed balance sheet and an anticipated slower recovery in the passenger car industry's gross margins in 2018. The research firm has raised its target fair value (FV) for GB Auto by 19% to EGP 4.66 per share, downgrading its recommendation to equal weight. The research firm updated its discounted cash flow (DCF) valuation on the automotive business after incorporating the third quarter (Q3) of 2017 financial results and projected developments in Q4 2017, amid the slowed balance sheet and the anticipated slower recovery. "GB Auto is still committed to its inventory liquidation plan initiated in Q2 2017, which was meant to free up cash stuck in working capital in order to lower debt to more sustainable levels," the research firm continued. Inventories amounted to EGP 2.9bn in November 2017, down from EGP 6.8bn in Q1 2017, Pharos highlighted, quoting GB Auto's management. However, the automotive industry firm did not channel all the cash generated towards debt reduction as it decided to secure higher-margin Completely Built Up (CBU) models in an attempt to regain profitability. Accordingly, the research firm forecast GB Auto's net debt to reach EGP 4.34bn by the end of 2018, versus initial expectations of EGP 3.59bn. GB Auto is currently working on improving profitability through increasing CBU sales at the expense of completely knocked down (CKD) sales and increasing the prices of cars by 1-2% every month, according to the report. Additionally, GB Auto has been able to negotiate with Original Equipment Manufacturers (OEM) for better prices on future shipments. As for GB Capital, a subsidiary of GB Auto, it is forecasted to generate a bottom line of about EGP 400m in 2018, mainly based on contracts signed in 2017, translating to a book value of EGP 1.25bn by the end of 2018, Pharos said. Meanwhile, MubasherTrade Research has upgraded its 12-month price target (PT) for Lecico Egypt to EGP 8.35 per share, with a buy/high risk recommendation, according to a recent report. The research firm highlighted that the key risks include "any increase in energy costs, any slowdown in European economy to which Lecico exports." "Longer-than-normal cash conversion cycle resulting in a high financial leverage, low return on invested capital versus weighted average cost of capital, no dividend distribution expected soon," the report continued. Lecico Egypt's revenues rose 88% year-over-year to EGP 633.6m in the third quarter of 2017, beating MubasherTrade Research's estimates (MTRe) of EGP 514.7m, the report noted. The research firm added that it used moving the cost of equity to reflect the inflation rate each year with the prevailing stability of exchange rates and the expected slowdown in inflation. In the same context, the research firm has adjusted their PT for Egypt Aluminium's stock from EGP 72.05 per share to EGP 144.1 per share on the effective date of the stock dividend, implying an upside potential of 8.9%. Therefore, the research firm changed their rating from buy/moderate risk to hold/moderate risk. "Distribution date is 11 January 2018 for share buyers up to 10 January 2018," the report noted. Egypt Aluminium is raising its issued capital to EGP 1.1bn from EGP 550m through a 100% stock dividend by doubling its total number of outstanding shares from 137.5m shares to 275.0m shares, the report added. On 13 September 2017, the Egyptian Exchange (EGX) announced that Egypt Aluminium has submitted documents to raise its issued capital to EGP 1.1bn from EGP 550m through bonus shares. Egypt Aluminium last posted a net profit of EGP 1.73bn for fiscal year 2016/2017, compared to EGP 84.8m in fiscal year 2015/16. The company's current capital amounts to EGP 550m distributed over 137.5m shares at a par value of EGP 4 per share.
