Earnings Report /

Eastern Tobacco: 3Q21/22 – Prices boost top-line; provisions take a toll on profitability

  • Prices boost top-line as regular burn cigarettes gets slowly replaced by heated and e-cigarettes

  • Interest income saves profitability, counterbalancing early retirement provisions

  • Maintain Overweight; Stock price factors-in loss in PMI revenues

Prices boost top-line as regular burn cigarettes get slowly replaced by heated and e-cigarettes

EAST recorded revenues of EGP4,248 mn during 3Q21/22, compared to EGP4,228 mn recorded in 2Q21/22, climbing by 0.6% QoQ and compared to EGP3,982 mn recorded in 3Q20/21, implying a rise of 6.7% YoY.

While the 9M21/22 revenues reached EGP12,781 mn, a rise of 5% YoY. The rise came mainly supported by a rise in local sales rather than in toll manufacturing sales, as local sales recorded EGP10,957 mn, a YoY rise of 9.8%. Toll manufacturing sales recorded EGP1,584 mn, a YoY drop of 9.6%. The rise came supported by the latest price increase, rather than volumes as volumes witnessed a drop of 1.4% YoY as consumers direct their consumption more towards e-cigarettes and heated non-burn cigarettes.

Interest income saves profitability, counterbalancing early retirement provisions

Gross profit recorded EGP1,853 mn during EGP3Q21/22, a sequential drop of 3.2% from the previously recorded EGP1,914 mn and a YoY rise of 9.1% from 3Q20/21 EGP1,698 mn, leading to a GPM of 43.6%, versus 45.3% in the previous quarter and 42.6% in 3Q20/21. Nine-month gross profit recorded EGP5,719 mn, climbing by 11% YoY, while GPM climbed by 2.4pps YoY to reach 44.7%.

EBIT for 3Q21/22 witnessed a steep decline by 29% QoQ and 27.4% YoY to record EGP1,225 mn. The decline is driven by a rise in the early retirement provisions EGP300 mn for the quarter, compared to EGP375 during 2Q21/22, taking into consideration the retirement provisions was not existing during FY20/21 and only started taking place by 1Q21/22, as well as a rise in SG&A expenses to record EGP264 mn (-1.4% QoQ, +27.4% YoY) with its percentage to sales recording 6.2%, compared to 6.3% in 2Q21/22 and 6.1% in 3Q20/21. EBIT margin reached a weak 28.8%, versus 40.9% in 2Q21/22 and 42.4% in 3Q20/21.

Bottom-line recorded EGP1,331 mn, a QoQ rise of 0.6% and a YoY drop of 1.5%. Despite the steep decline in EBIT, interest income was able to cushion the blow on bottom line, recording EGP121 mn in 3Q21/22, compared to EGP15 mn in 2Q21/22, and EGP36 mn in 3Q20/21, leading to a NPM of 31.3%, flat QoQ and declining by 2.6pps YoY from the previously recorded 33.9%.

Maintain Overweight; Stock price factors-in loss in PMI revenues

As the company planned to focus its production in its industrial city and make use of the old country-wide scattered buildings and factories, the early retirement program took place offering nearly 3k workers the opportunity to leave, allowing the company to reduce the labor force and further automate the production process, enhancing efficiency. Booking the provisions for the program began by the beginning of FY21/22, expecting to end the year with an average of EGP1.2 bn, from EGP675 mn currently.

On a separate note, the company declared earlier that their negotiations with Phillip Morris local agent resulted in their agreement to participate in United Tobacco Company’s capital (the company winning the license) by 24%, amounting to EGP100 mn. Noting that the 24% is granted to EAST without them bearing any costs for the license. Also, the company declared the restructuring of the contract for manufacturing PMI products immediately after the issuance of the manufacturing and operating license as follows:

  1. Upon obtaining the license, United Company will lease the building and the current production lines dedicated to the production of Phillip Morris products for a period of 3 years, with the leasing value yet to be declared.

  2. EAST to continue manufacturing Phillip Morris products on the same production lines until the end of the current financial year 2021/2022 and with the previously agreed-upon quantities.

The leasing contract for the building is EGP200 mn per annum, while the value for the lines and machinery is yet to be disclosed. Furthermore, UTC is currently the only company in the country with the license to manufacture heated cigarettes, giving EAST indirect exposure to a vastly growing market that is slowly replacing regular cigarettes within the toll manufacturing segment.

Phillip Morris's products contributed to revenues by nearly 10% yearly (less than EGP2 bn). The 10% will not be making a presence in the top-line by the beginning of FY22/23, however, such loss is expected to be compensated by EAST’s share in UTC earnings eventually and hopefully by the leasing contracts.

EAST is currently trading at FY21/22 P/E of 4.9x and EV/EBITDA of 2.8x