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Higher selling prices, volume recovery, and replenished inventory should enhance EAST’s operations over FY25/26–29/30e
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The ERP and investment income from UTC should also preserve EAST’s profitability and support cash dividend distribution
In a recent report, HC Brokerage presented their vision about Egypt’s consumers sector through an updated evaluation of Eastern Company where they expect the company’s profitability to be preserved.
Pakinam El-Etriby, Consumers Analyst at HC commented that: “FX availability, tax brackets adjustment, and price hikes improved EAST fundamentals, in our view: After a challenging 2023 and part of 2024, EAST witnessed several positive developments. In 4Q22/23 and FY23/24, its local cigarette volumes significantly declined, primarily due to USD shortages and a hike in raw tobacco prices. At that time, Egypt experienced an FX crunch, which limited EAST’s ability to import raw tobacco. As a result, its volumes dropped by c46% y-o-y to 8,660m cigarettes in 4Q22/23 and c26% y-o-y to 43,158m cigarettes in FY23/24, from an average quarterly level of 16,306m cigarettes and yearly level of 64,919m cigarettes in the previous three years. However, by 4Q23/24, volumes began to recover following the 6 March EGP devaluation and the USD35bn Ras El Hekma deal, which improved USD liquidity at banks and raw materials importation. Volumes increased by c28% y-o-y in 4Q23/24, c70% y-o-y in 1Q24/25, and c33% y-o-y in 2Q24/25, yet declined by c19% q-o-q in 3Q24/25 due to Ramadan seasonality in March. On the pricing front, EAST increased its selling prices in November 2024 by c12%; however, not enough to restore its margins. And on 29 June, the government allowed an exceptional measure by increasing the retail price ceiling of the first tax bracket by c23% to EGP48.0/pack, allowing EAST to increase its retail prices on 18 July by c14%, and paving the way for it to revert to its higher pre-FX crunch margins. The government also approved increasing the local cigarette flat tax by only EGP0.50/pack, which is also positive given that the new flat tax of EGP5.00/pack represents 10.4% of the retail price of EGP48.0/pack, compared to the previous EGP4.50/pack flat tax, representing 11.6% of the retail price of EGP38.9/pack. EAST also increased its inventory coverage to 11.3 months in 3Q24/25 from 7.1 months in 2Q24/25 and 2.5 months in 1Q24/25, to mitigate inflationary pressures. The company sold its Factory Nine to United Tobacco Company (UTC) in July 2024 for EGP1.58bn, and hence it ceased to recognize leasing income from it starting 2Q24/25.
“We forecast EAST net income to grow at an FY26/27—29/30e CAGR of c14%, supporting future cash dividend distribution: In FY25/26e, we expect revenue to grow by c49% y-o-y to EGP58.7bn (c32% above our prior estimate), largely attributed to c33% y-o-y increase in local ex-factory prices to EGP17.1/pack (versus our previous estimate of EGP11.4/pack) while volumes increasing by c12% y-o-y to 64,831m cigarettes (slightly below our earlier estimate of 68,416m cigarettes). We assume a further c12% increase in the tax bracket in 2Q25/26e to EGP53.8/pack from EGP48.0/pack, assuming a retail price of EGP50.0/pack (ex-factory price of EGP18.7/pack) by 4Q25/26e. Over our FY26/27—29/30e forecast period, we expect revenue to grow at a CAGR of c10%, underpinned by volume and price growth of c2% and c8%, respectively, as volumes normalize and price increase momentum continues. We estimate FY25/26e GPM to expand by c9 pp y-o-y to c39%, supported by higher prices and ERP-related cost efficiencies, and average c44% over our FY26/27—29/30e forecast period. We forecast EBIT margin to increase by c10 pp y-o-y to c37% in FY25/26e, and average c42% over our FY26/27—29/30e forecast period. We anticipate EAST to record provisions of EGP2.43bn in FY24/25e for its early retirement program (ERP), assuming 2,000 employees opt in, resulting in annual savings of EGP529m, on our numbers, and expect it to stop provisioning for it post FY24/25e. As a result of the margins expansion, cost reduction, and hefty investment income from UTC, especially after it increased its selling prices in July, we expect EAST’s EPS to grow at a FY26/27—29/30e CAGR of c14%, supporting future cash dividend distribution. While EAST had consistently maintained a net cash position, it turned into a net debt position of EGP2.31bn as of 3Q24/25, parallel to its strategy to build up inventory to hedge inflationary pressures. However, assuming a drop in the cash conversion cycle (CCC) to nine months in 4Q24/25e from around 15 months in 3Q24/25, we expect EAST to start reverting to a net cash position of EGP8.10bn as of 4Q24/25e and remain in a net cash position until the end of our forecast period.” Pakinam concluded.
About HC Brokerage
HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311
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