Earnings Report /
Egypt

Eastern Tobacco: 2QFY20/21 Record-high sales figure and exceptional margins

  • EAST achieves record-high sales figure supported by exceptional increase in sales volumes

  • Indirect price increases and stable direct materials elevate margins

  • Positive outlook on volumes and margins; Maintain OW

Al Ahly Pharos Securities Brokerage
31 January 2021

EAST achieves record-high sales figure supported by exceptional increase in sales volumes

EAST recorded EGP4.211 billion in revenues in 2QFY20/21, up 5.9% YoY and 6.5% QoQ but lower than our expectations of EGP4.735 billion. This increase in revenues came as a result of: 1) increase in local cigarettes sales volumes by 8.6% YoY to reach around 17.5 billion cigarettes resulting in local sales revenues of EGP3.328 billion ( up 10% YoY and 8% QoQ), 2) indirect price increases through reducing the retailer margins, from the beginning of December, from EGP1 to EGP0.25 per package which contains 10 boxes, 3) sales volumes of domestic cigars increased 44% YoY to reach 303 million cigars , 4) increase in JV segment by 33% YoY. EAST recorded EGP8.166 billion in revenues for 1HFY20/21, up 6% YoY.

Indirect price increases and stable direct materials elevate margins

Gross profit for the quarter increased by 10.1% YoY and 13.6% QoQ to reach EGP1.831 billion representing a GPM of 43.5% vs 41.8% in 2QFY19/20 (+1.7pps YoY) and 40.7% in 1QFY20/21 (+2.7pps QoQ). This increase in the margin came on the back of: 1) raised production and sales efficiency, 2) reaching record sales volumes, 3) stable costs of direct materials and raising efficiency in tobacco usage. Gross profit for 1HFY20/21 recorded EGP3.442 billion, up 9% YoY. GPM recorded 42.1%, +1.1pps YoY. SG&A/revenues amounted to 5.8% in 2QFY20/21 vs 5.9% in 2QFY19/20 and 5.5% in 1QFY20/21. EBIT for the quarter increased by 17.9% YoY and 16.8% QoQ to EGP1.638 billion with EBIT margin increasing as well by 4.0pps YoY and 3.4pps QoQ to reach 38.9%, mirroring the improvement in GPM.

Accordingly, net profit for the quarter recorded EGP1.375 billion, up 18.8% YoY and 18.2% QoQ considering the factors mentioned above. This came in-line with our expectations of EGP1.384 billion. EAST recorded NPM of 32.7% vs 29.1% in 2QFY19/20 (+3.5pps YoY) and 29.4% in 1QFY20/21 (+3.2pps QoQ). Net profit after non-controlling interest for 1HFY20/21 came in at EGP3.282 billion, up 48% YoY. NPM for 1HFY20/21 came in at 40.2% which is higher by 11.4pps compared to 28.8% in 1HFY19/20.

Positive outlook on volumes and margins; Maintain OW

EAST renewed and extended the contract with Philip Morris International (PMI) with the same terms and conditions previously contracted. It already increased the capacity of the current machines by 10-15% and the capacity utilization is 90%. This capacity is expected to increase further by another 10%. Moreover, the company is planning to offer a heat-not-burn (e-cigarettes) product and is in discussions with three companies on how to introduce its brand to the market. It is expected to be introduced by EAST before the end of FY21 to the market. Additionally, EAST is planning to come with its own brand to fulfil the need of the targeted segment which is the C income group. The company’s strategy is to give more attention to the efficiency and utilization of the machines and raw materials. EAST is targeting total revenue of EGP15.9 billion and net profit of EGP4.3 billion for FY20/21. These targets are lower than our revenue projection but higher on the level of bottom line due to targeting higher margins (stated below in Table 3). 

EAST is trading at a P/E FY20/21 of 7.0x and EV/EBITDA of 3.7x.