AutoWallis: Earnings Recovery Delayed
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A new world may be dawning for Brazil
Elections are coming up in Brazil in October: of the two candidates who appear to be the frontrunners, current President Lula’s lead over his main challenger, Flávio Bolsonaro, appeared to be waning according to opinion polls. The race is not yet decided, and the stakes are high, as the next president will face, among other tasks, the challenge of allaying market participants’ concerns about Brazil’s growing national debt. Based on initial market reactions, investors are responding positively to Flávio Bolsonaro’s narrowing of the gap with Lula in the polls; or, to put it another way, market participants appear to be placing their trust in a stricter fiscal policy and spending cuts than before, as well as in the possibility of lower interest rates resulting from this and less government intervention. There is still roughly one month left until the Brazilian elections, and the next president will set the course for both Brazil and the local stock market in the coming period.
Hungary: Inflation in August was 1.3% YoY much below the inflation target, but service inflation is still high
Hungary's headline inflation increased to 1.3% year-on-year in August from 1.2% in July. The published data was lower than the consensus and our forecast (both 1.4%). The lower-than-expected inflation was due to above expectation core inflation but lower than expected fuel inflation and lower increase of administered prices.
Following the latest quarterly results, we have revised our DCF model and earnings estimates. We cut our 12-month price target to HUF 158 and downgrade the shares to Hold from Buy. The challenges facing the Distribution business unit have not been resolved and, if anything, intensified during the first half of the year. This was the key driver behind our downward revisions to this year’s revenue and earnings forecasts.
Growth also slowed in Retail, while margins remained under pressure. We therefore expect the recovery in profitability to take longer to materialise and to be less pronounced than previously anticipated. Mobility continues to stand out in terms of earnings generation, but its contribution at Group level remains too small to offset the weak performance of the automotive distribution and retail businesses.
Following the model update, we forecast a low-single-digit revenue CAGR of 3.6% and an EBITDA CAGR of 7.4% over the forecast period. As before, our updated model does not incorporate any future acquisitions. On this basis, we expect revenue to approach HUF 570bn and EBITDA to reach approximately HUF 27bn by 2030. These figures are well below management’s current targets, raising the question of whether the financial targets set out in the company’s previous 2028 growth strategy will need to be materially revised.
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