Flash Report /
Egypt

Eastern Company: Management webinar key takeaways

  • Volumes stronger than ever

  • Pricing strategy

  • Cost efficiency and higher profitability in focus

Al Ahly Pharos Securities Brokerage
19 January 2021

Volumes Stronger Than Ever

  • Production and sales volumes in November 2020 reached record levels with sales volumes exceeding 6.1 billion cigarettes (+16% YoY and +9% QoQ) and management expected volumes to increase more in December 2020.

  • The company already increased the capacity of the current machines by 10-15% and the capacity utilization is 90% of the current capacity; however, this capacity is expected to increase further by another 10%. The company believes that there is an opportunity to sell more products and that’s the reason behind increasing the capacity.

  • Solid results QoQ and YoY are expected for 2QFY20/21 which should be released by the end of the month. October and November 2020 already showed very strong indicators.

  • Production has been disrupted in May and June 2020 because of the outbreak of the pandemic which affected the company’s production. The company returned to its pre-covid performance and achieved even better performance as the company adopted effective strategies to improve all indicators and margins.

  • There has been some stockpiling in 4Q20, which boosted the sold volumes. However, the management is always trying to control sales to match the actual needs of the market.  

  • Smuggled products come with cheaper prices than that of EAST. The company’s strategy is to enhance its reach directly to the customers so that there will be no place for smuggled products.

Pricing Strategy

  • The company increased the prices of the cigars and other brands and implemented indirect price increases through cutting retailer margins. However, the management believes that price increases are not the only possible way to improve the profitability of the company at this point of time but there are other things like: utilization, efficiency, volume growth and profitability enhancement. The management believes that the market is not stagnant and there is a room for increases in volumes.

  • The company reduced the retailer margins by EGP0.15/pack, then reduced it again by EGP0.075/pack to reach EGP0.025/ pack which is very low compared to other companies which are paying at least EGP0.25/pack. This resulted in controlled costs and increased profits.

  • The company will not increase prices unless there is a need to raise prices, like if it faced a cost rise which raised the need to pass it on. 

  • The increase in the fees collected in favor of financing the health insurance program will not affect the company’s revenues.

Cost Efficiency and Higher Profitability in Focus

  • The company is working to reduce the waste as it is higher than the peers. The company already reduced wastes of tobacco by 3% which is the highest cost constitution in COGS. Some suppliers already reduced the prices of raw materials and the company expects more suppliers to lower their prices through contract renegotiations. 

  • The tobacco commodity has a strong positive relationship with inflation, so its prices increase with increasing inflation.

  • The company reduced the possibility of having interruptions in the supply chain as the company already has enough inventory to cover several months ahead.

  • The stock of tobacco was around EGP7 billion two years ago, but the company managed to reduce the tobacco stock level to EGP2.5 billion.

  • The company is delivering 3.2 billion packs a year translating into 11 million packs daily. The company has a strong distribution team, but it is working on improving the distribution system which needs enhancement.

  • The company’s strategy is to give more attention to the efficiency and utilization of the machines and raw materials.

  • The company is considering consolidating all the factories in one factory which will require some opex and capex spending on the machines and staff.

  • The company is working on early retirement plans and the number of employees has been reduced from 14k to 13k and the company is planning to decrease it further by around 1.5k during FY20/21 and FY21/22. This is expected to cost the company more than EGP1 billion but will support profits on the long-term.

  • EAST is focusing recently on cash management and introduced a new committee to manage the cash collected. It is enhancing the return on its cash through investing in T-bills in the period between collecting the money and paying to the government the taxes. This results in 1-2% of interest collected on these amounts which support the bottom-line of the company.

  • The company recently signed an agreement with NBE to automate its monetary transactions to comply with the government’s financial inclusion initiative and to control collections.

New Product, PMI Agreement, Unutilized Assets and Distributions 

  • 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 tol be introduced by EAST before the end of FY21 to the market. EAST is planning to come with its own brand to fulfil the need of the targeted segment which is the C income group.

  • EAST has a great relation with Philip Morris and more details regarding the contract negotiations will be available within 10 days.

  • The company is waiting for the right time and price to sell its unutilized assets.

  • Concerning profit appropriation, at least 10% are distributed to employees and a maximum of 10% is distributed to the board members.

  • There are no current intentions to decreasing the dividends for FY2021. The company will maintain at least the same level of dividends as FY2020 which was EGP1.43/share (payout ratio was 42%) resulting in dividends yield of 10%.