Eastern Tobacco: 3QFY20/21 – Productivity and enhanced efficiency drive sales and margins

  • Healthy annual growth of topline driven by an increase in local sales volumes, despite weakness in toll manufacturing
  • Higher productivity and sales efficiency elevate margins YoY
  • Positive outlook on volumes and margins; Maintain OW

Healthy annual growth of topline driven by an increase in local sales volumes, despite weakness in toll manufacturing and moassel

EAST recorded EGP3.982 billion in revenues in 3QFY20/21, down 5.4% QoQ but up 8.3% YoY. This is much lower than our expectations of EGP4.493 billion.

This annual increase in revenues came as a result of: 1) increase in local cigarettes sales volumes by 11% YoY to reach around 17.1 billion cigarettes resulting in local sales revenues of EGP3.305 billion ( up 14% YoY but -0.7% 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 15% YoY, 4) increase in sales volume of JV segment by 14% YoY to reach 506 million cigarettes. However, toll manufacturing sales value dropped by 19% YoY to EGP495 million because of lower production orders from foreign brands, partially due to local cigarettes gaining a higher market share.

EAST recorded EGP12.1 billion in revenues for 9MFY20/21, up 7% YoY driven by a 7.4% increase in local sales volumes. Moassel segment has been hard hit by the pandemic and closure of coffee shops. However, this is offset by the exceptional performance of the cigarettes segment.

Higher productivity and sales efficiency elevate margins YoY

Gross profit for the quarter decreased by 7.2% QoQ but grew 15.2% YoY to reach EGP1.7 billion representing a GPM of 42.6% vs 43.5% in 2QFY20/21 (-0.8pps QoQ) and 40.1% in 3QFY19/20 (+2.6pps YoY). 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. SG&A/revenues amounted to 6.1% in 3QFY20/21 vs 5.8% in 2QFY19/20 and 6.2% in 3QFY19/20. EBITDA for the quarter dropped by 7% QoQ but was up 5% YoY and reached EGP1.47 billion with EBITDA margin of 36.9% (-0.8pps QoQ and -1.1pps YoY).

Gross profit for 9MFY20/21 recorded EGP5.1 billion, up 11% YoY. GPM recorded 42.3%, +1.6pps YoY.

Accordingly, net profit for the quarter recorded EGP1.35 billion, up 47.8% YoY but down 1.8% QoQ and slightly lower than our expectations of EGP1.426 billion. This came in 28% higher than EAST’s budget. This reflects an NPM of 33.9% which is +9.1pps YoY and +1.3pps QoQ. 

Net profit after non-controlling interest for 9MFY20/21 came in at EGP3.889 billion, up 24% YoY. NPM for 9MFY20/21 came in at 32% which is higher by 4pps compared to 27.5% in 9MFY19/20. It is noteworthy that 9MFY20/21 net profit came in higher than that of the full-year FY2019/20 by 2.5%.

Positive outlook on volumes and margins; Maintain OW

FY2021 is expected to be an exceptional year in the history of EAST with record sales and profitability. The company’s strategy is to give more attention to the efficiency and utilization of the machines and raw materials. 

EAST is having 13-14 days of inventory on hand for the first time in 3 years as a result of the increased production caused by efficiency and better utilization rates. The company plans to increase days on hand of inventory to 3-4 weeks. EAST 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%. 

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 the end of 2021 or by January 2022.  EAST is planning to come with its own brand to fulfill the need of the targeted segment which is the C income group. 

Management noted that the new tobacco license, if approved, will not have an effect on EAST for a minimum of 2 years.

EAST is targeting total revenue of EGP15.9 billion and a net profit of EGP4.3 billion for FY20/21. These targets are lower than our revenue projection but higher on the level of the bottom line due to targeting higher margins (stated below in Table 3).  

EAST is trading at a P/E FY20/21 of 5.2x and EV/EBITDA of 2.8x.

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