Earnings Report /
Egypt

Eastern Tobacco: Q2 19/20: Margins saved by revenue mix and EGP appreciation; maintain Overweight

    Al Ahly Pharos Securities Brokerage
    17 February 2020

    Annual topline growth driven by indirect price hikes

    EAST recorded EGP3,976 million in revenues in 2Q19/20, +6.5% YoY and 7.0% QoQ. Annual topline growth was driven by both proprietary brands and toll manufacturing revenue growth, adding 4.3% and 18.0% YoY respectively, mainly on the back of indirect price increases and enhanced sales mix albeit at almost flat volumes compared to 2Q18/19 (c.16.9 billion sticks). In Aug19, EAST disclosed that it had cut retailers’ margin for some of its local brands (from EGP0.25 to EGP0.15), and management replaced the low-margin ‘Cleopatra King’ brand with the higher-margin ‘Cleopatra Queen’ brand, which created “an indirect price increase” effect. 

    Margin expansion supported by raw material costs

    2Q19/20 GPM recorded 41.8% vs 38.9% in 2Q18/19 (+2.9pps YoY) and 40.0% in 1Q19/20 (+1.8pps QoQ). Annual GPM expansion was supported by lower raw material costs (-4.5% YoY) largely as a result of the strength in the local exchange rate. 

    EBITDA margin reflected the same increase in GPM (+2.9pps YoY and +1.4pps QoQ) in 2Q19/20, despite having a marginally higher SG&A expense/revenues for the period at 5.9% (+0.5pps YoY and +0.5% QoQ). Quarterly NPM amounted to 29.1% , up by 1.3pps YoY and 0.6pps QoQ, despite reporting a lower FX gain, lower net interest income (-5.7% YoY), which trimmed, marginally, the margin expansion noted above.

    Awaiting price change catalyst; maintain Overweight

    With volumes normalising and delivering minute growth over the last three years, we believe price hikes will be a key driver for sales growth. The delay in the implementation of the hike in tax brackets has constrained EAST from raising prices without moving proprietary brands into a higher bracket. However, the margin expansion witnesses as a result of a more favorable FX environment, a trend we expect to carry over throughout the year, is definitely a positive development, and will create a cushion for share price movement, up until meaningful price increases are enacted. We are hoping that the new tax brackets would come into effect before the government’s new fiscal year, or June 2020. 

    EAST is trading at an EV/EBITDA19/20 of 5.1x and P/E19/20 of 9.7x, which are below global peer group average of 9.3x and 13.4x, respectively.