AutoWallis: Earnings Recovery Delayed
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A historic turning point in Brazil’s presidential election
In Brazil’s presidential election, Lula achieved something no one had managed in nearly four decades: he overturned a first-round defeat to win the runoff and he will become president for a fourth term. However, market participants had priced in a victory for Flávio Bolsonaro and, with it, the prospect of a fiscal turnaround. Lula’s win therefore triggered a significant correction in the Brazilian stock market. Lula will face a difficult balancing act between market participants demanding fiscal consolidation, voters expecting him to deliver on his campaign promises, and an increasingly right-leaning Congress where governing will require political compromise. Although Brazilian equities remain attractively valued, post-election uncertainty may keep Brazilian assets under pressure in the short term.
Commodities - Technical Analysis
There has been no change in the downward trend for gold and silver, but selling pressure is easing for both precious metals. As long as the trend lines driving the decline remain intact, a sustained reversal cannot be expected. The price of oil has broken through the 100 level, and the trend remains upward for now. Natural gas may correct higher following a sharp price decline. Copper, trading within a wider range, may be approaching the upper end of that range. After sharp declines, wheat and corn prices may have reached key levels where the likelihood of a reversal is increasing.
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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