Cairo – Mubasher: Pharos Research has raised their target fair value (FV) for Ghabbour Auto (GB Auto) by 19% to EGP 4.66 per share, downgrading recommendation to Equalweight, according to a recent report.

The research firm updated its discounted cash flow (DCF) valuation on the automotive business after incorporating the third-quarter of 2017 financial results and projected developments in Q4-17, amid a slowed balance sheet and an anticipated slower recovery in passenger car business segment gross margins in 2018.

GB capital, a subsidiary of GB Auto, is forecast to generate a bottom line of about EGP 400 million in 2018, mainly based on contracts signed in 2017, translating to a book value of EGP 1.25 billion by the end of 2018, Pharos said.

“GB Auto is still committed to its inventory liquidation plan initiated in 2Q17, 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 2.9 billion in November 2017, down from EGP 6.8 billion in Q1-17, 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 4.34 billion by the end of 2018, versus initial expectations of EGP 3.59 billion.

GD 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 a 1-2% every month, according to the report.

Additionally, GD Auto has been able to negotiate with Original Equipment Manufacturers (OEM) for better prices on future shipments.