Equity Analysis /
Egypt

Eastern Tobacco: Raise FV – performance tied to repricing ability

    Al Ahly Pharos Securities Brokerage
    3 November 2019

    Management Looking to Steer Away From Price-Dependency

    Eastern Tobacco is a leading tobacco manufacturer with over 87.6 billion cigarettes produced in FY18/19, with a capacity to reach 112.7 billion sticks. With recent volumes increasing at a slower rate than previous years, we believe price hikes will be primary reason for continued sales growth. However, we expect volumes to gradually pickup as management implements its transformational plan to enhance product quality and efficiency. According to our estimates, sales is expected to grow at a CAGR of 9% over 2019-2024. EAST produces both local and toll-manufacturing products with a plan to target all market segments. Japan Tobacco International (JTI), contracted with EAST to toll-manufacture its products, aims to increase its market share to 2.5-3% in Egypt from a current share of 2%. Management is also studying plans to expand their export sales in the coming period and reignited export contracts with Misr Duty Free Shops & Egypt Air worth USD4 million. Since the new management’s appointment in Jan19, EAST is looking to enhance its portfolio quality as well as capture market share in unpenetrated markets such as shisha flavored tobacco. In March19, management announced a shisha tobacco export contract with UAE’s Al-Wahdania General Trading Company; to be sold in UAE, Bahrain and Oman.

    Margins To Normalize, Cushioned by Sales Growth

    We project EAST’s margins to normalize compared to FY18/19 despite increased cost pressure as well as further interest rates cuts. However, we believe that the expected price revision and subsequent sales growth would limit the pressure on margins. We project GP, EBITDA and NP margins to record 36%, 36% and 24% respectively in FY19/20 vs 37%,36%, and 25% in FY18/19. Margins are projected to normalize over our forecast horizon as well.

    Trading at a Discount; Payout Stabilizes

    We update our valuation on EAST and revise our FV to EGP20.50/share (up from EGP19.80/share) and maintain our Overweight recommendation on an upside of 27%. We upgrade our FV after rolling over our model for 1 year and incorporating revised FX rates and risk-free rate. EAST is trading at an EV/EBITDA 20f of 5.6x and P/E 20f of 10.2x, which is well below global peer group average. We maintain a dividend payout of 55% over our forecast horizon, which translates into a DPS of EGP0.90 and a dividend yield of 5.4% in FY19/20.