Earnings Report /
Egypt

Eastern Tobacco: 1Q22/23 – Local sales supports profitability; retirement program to linger

  • Local revenues continue the rise; Toll sales dive by Phillip Morris phasing out and declining demand for e-options

  • Early retirement program to linger for one more year, affecting margins and bottom-line

  • Supported by local sales; UTC to give an extra push; Maintain Overweight

Al Ahly Pharos Securities Brokerage
16 November 2022

Local revenues continue the rise; Toll sales dive by Phillip Morris phasing out and declining demand for e-options

EAST had a solid start for the year by achieving revenues of EGP4,624 mn compared to EGP4,311 mn in 1Q21/22 and EGP4,358 mn in 4Q21/22, reflecting a YoY incline of 7.3% and 6.1% QoQ.

The rise came backed by the increase in local cigarette sales (90% of total revenue) by 13% YoY to record EGP4,154 mn compared to a previous EGP3,678 mn in 1Q21/22, as well as an increase in the value of JV sales (2% of total revenues) by 22% YoY to record EGP104 mn compared to EGP85 mn achieved in 1Q21/22. Meanwhile, toll manufacturing sales (7% of total revenues during 1Q22/23 from a previous 14% in 1Q21/22) dropped by 36% YoY to record EGP342 mn from a previous EGP535 mn, backed by the phasing out of Phillip Morris after the implementation of the new manufacturing license and continuing slowdown in toll demand as many customers direct their consumption towards the newly introduced heated non-burn options.

Early retirement program to linger for one more year, affecting margins and bottom-line

Gross profit recorded EGP2,361 mn, compared to EGP1,952 mn recorded in 1Q21/22 and EGP2,160 mn recorded in 4Q21/22 (+20.9% YoY, +9.3% QoQ), backed by the implemented price increases and cost optimization strategies as nearly all COGS accounts witnessed a YoY drop, leading to a GPM of 51.1%, versus 45.3% recorded in 1Q21/22 and 49.6% recorded in 4Q21/22.

EBT for the quarter recorded EGP1,960 mn, compared to EGP2,041 achieved in 1Q21/22 with a drop of 4% YoY and losses of EGP183 mn recorded in 4Q21/22. The annual drop came backed by an incline in provisions to reach EGP561 mn from a previous EGP75 mn. These provisions are part of the early retirement program which is expected to continue throughout FY22/23 to end the year at an average of EGP1.0 bn, compared to EGP1.2 bn in FY21/22.

Bottom-line for the quarter recorded EGP1,405 mn, above the previous 4Q21/22 losses of EGP222 mn, yet below 1Q21/22 profits of EGP1,598 mn by 12.1% YoY backed by the heightened provision expenses, leading to a NPM of 30.4%, versus 37.1% in 1Q21/22 and NLM of 5.1% in 4Q21/22.

EAST’s cash position reached EGP14,311 mn from a previous EGP11,652 mn recorded at FY21/22 year end, with a rise of 23%.

Supported by local sales; UTC to give an extra push; Maintain Overweight

The rising demand for the company’s local brand along with heightened prices and their cost optimization strategies delivered solid top-line, gross profitability, and margins, all to be partially offset by the still-lingering early retirement program. The program will be expanded for one more year with an expected cost of EGP1.0 bn. However, the outcome of the new license and their 24% in the newly-formed United Tobacco Company (UTC) is still not completely clear as it is dependent on UTC performance that is yet to be disclosed.

EAST is currently trading at a FY22/23 P/E of 7.2x and an EV/EBITDA of 3.6x.