Equity Analysis /
Egypt

Eastern Tobacco: Q4 18/19 results – Prices continue to support annual top-line growth

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    12 September 2019

    EAST reported Q4 18/19 revenues of EGP3,431mn, up 2% qoq and 1% yoy. Sequential improvement is attributed to volume growth since we have not witnessed any price-hikes in Q4 18/19. On the other hand, annual improvement  was mostly price-driven; ASP went up by c15% in July 2018.

    EAST also reported FY 18/19 revenues of EGP13,894mn, up 4% yoy. Despite annual volumes dropping by 3% yoy, annual enhancement was uplifted through higher price. As shown below, sales value recorded an increase whereas volumes dropped across the board. 

    EAST volumes sold and sales value

    Volumes sold (bn)17/1818/19yoy

    Local + export

    64.04

    62.06

    -3%

    Toll-manufacturing

    22.0

    21.0

    -5%

    Total

    86.0

    83.1

    -3%


    Sales value (EGPmn)17/1818/19yoy

    Local + export

    11,087

    11,554

    4%

    Toll-manufacturing

    2,324

    2,340

    1%

    Total

    13,411

    13,894

    4%

    Source: Company disclosure

    Full-year margins pressured by higher opex, FX loss and lower interest income

    On a quarterly basis, EAST recorded GPM of 34.2% vs 36.2% in Q3 18/19. The sequential drop was a result of increased cost pressure (+5% qoq) vs lower sales growth (+2% qoq). Following the GPM trend, EBITDA margin also declined (-2.4ppts qoq) due to  ‘administrative expenses’ surging by 20% qoq. Despite net interest balance increasing by 43% qoq, NPM dropped as a result of lower reversed provisions (-70% qoq). 

    On the other hand, annual GPM improved (+2ppts yoy) on the back of lower COGS (-2% yoy). Supported by enhanced GPM, EBITDA margin also increased (+0.8ppts yoy) as SG&A expenses dropped by -9% yoy. With EAST recording a provisions reversal of EGP10mn in Q4 18/19 vs provisions booked of EGP116mn in Q4 17/18, NPM growth (+0.7ppts yoy) was slightly dragged down as net interest balance fell by 57% yoy.

    On an annual basis, GPM decreased by 1.9ppts yoy as a result of increased cost pressure (+7% yoy): 1) raw materials increasing by 4% yoy, and 2) wages increasing by 8% yoy. We believe the increase in raw material price is due to higher global tobacco price, despite EGP/USD appreciation. Margins continued to be dragged down further where EBITDA margin decreased by 1.6ppts yoy due to higher ‘administrative expenses’; driven by ‘wages’ increasing by 14% yoy. Further down the line, NPM was also pressured as EAST recorded lower investment income (-81% yoy), higher FX loss (+384% yoy), and lower net interest balance (-56% yoy).

    EAST distributes EGP1.0 dividend; proposed tax bracket to enhance profitability 

    Management announced a DPS of EGP1.0/share (DY 6.3%). Management also announced FY 19/20 capex plans of EGP1.14bn vs EGP1.24bn targeted in FY 18/19 (-8% yoy). EGP1.11bn will be dedicated to machinery upgrades, EGP10mn in completing projects pending from FY 18/19 and EGP25mn on new projects. Management aims to increase the volume of exports in FY 19/20 by 88% yoy, through a rise in shisha tobacco sales by 50%, in turn driven by 25% yoy volume increase in FY 19/20. Management aims to transfer unutilised land licenses to commercial (from industrial) and is looking into selling these plots. Total unutilised land is estimated at 50feddans (200,000 sqm). This might generate EGP0.75-1.75 per share in sales proceeds.

    In an effort to increase tax contributions from tobacco sales, the Ministry of Finance (MoF) is looking to amend the current tax brackets in mid-FY 19/20. The following is a draft of the possible changes:

    1. Bracket 1:  packs sold below EGP20 (previously below EGP18), fixed tax rate to be maintained at EGP3.5.
    2. Bracket 2:  packs sold at EGP20-34 (previously at EGP18-30), fixed tax rate to rise to EGP6.0 from EGP 5.5.
    3. Bracket 3:  packs sold at above EGP34 (previously above EGP30), fixed tax rate to rise to EGP7.0 from EGP 6.5.  

    The Tax Authority is expecting to net EGP10-11bn from the expected amendments. Following the implementation of tax brackets, we expect EAST to raise its prices without moving their brands into a higher bracket and therefore, reflect higher profitability.

    EAST is trading at an EV/EBITDA19/20 of 4.7x and P/E19/20 of 8.1x, which are below peer group average of 10.6x and 14.5x, respectively. We reiterate our Overweight recommendation on EAST with an unchanged TP of EGP19.8.