In a recent report, HC Brokerage presented their updated evaluation of Eastern Company where they upward revised their revenue estimates.
Higher local cigarette selling prices should support EAST’s operating margins over our FY22/23–27/28e forecast period
Machinery leasing income and investment income from UTC should also preserve EAST’s profitability and cash distribution capabilities
Pakinam El-Etriby, Consumers Analyst at HC commented that: “ We upward revise our revenue estimates by c78%, with an average 16.9% y-o-y price increase over our FY22/23–27/28e forecast period: On 25 March 2023, Eastern Company’s board approved increasing the retail price of its local cigarette brands by EGP1.00–3.00/pack, following the EGP2.00/pack price increase in September 2022, to preserve its operating margins and withstand higher raw tobacco cost, translating into a c34% y-o-y increase in the FY22/23e ex-factory price to EGP5.72/pack. Furthermore, we forecast an average increase of c13% in the blended local ex-factory price over FY23/24–27/28e, from our previous estimated average increase of 3.11%, assuming that the company still operates within the EGP4.00/pack flat tax bracket as the Egyptian government did not yet announce any revision to the flat tax brackets. Moreover, EAST’s 24%-owned subsidiary United Tobacco Company (UTC) increased its ex-factory prices to an average of EGP17.2/pack from an average of EGP14.7/pack, positively contributing to EAST’s profitability. Nevertheless, we estimate FY22/23–23/24e local cigarette volumes to drop by an average of c6% y-o-y, negatively impacted by the FX shortage implications. Yet, over FY24/25–27/28e, we expect volumes to normalize and increase by an average c5% y-o-y to 71.9bn cigarettes by the end of our forecast period. Therefore, we estimate EAST’s top line to grow at a 6-year CAGR of c19% over our forecast period, translating into an upward revision of c78% in our FY22/23–27/28e total revenue estimates.”
“We upward revise our FY22/23–27/28e gross profit estimates by c95%, on average: We upward revise our FY22/23–27/28e gross profit estimates on the higher local cigarette selling prices, leaving our GPM to average c42% over our forecast period, up from a previously estimated average of c39% over the same forecast period. However, we estimate a c5 pp y-o-y drop in FY23/24e GPM to 39.9% due to a weaker EGP and inflationary pressures, inflating EAST’s imported raw material costs. Moreover, May’s average tobacco prices increased by c45% y-o-y to USD6,780/ton, according to Brazil’s tobacco export data from the Ministry of Economics of Brazil. Nonetheless, starting FY24/25e, we expect GPM to normalize, reaching c43% by the end of our forecast period. As a result, we forecast the EBITDA margin to average c40% over our forecast period, leaving our terminal margin at c41%. As for EAST’s NPM, we expect it to average c41% over FY22/23–27/28e, up from an average of c27% over the past six years, primarily backed by both the machinery leasing income and investment income from UTC. We expect the investment income from UTC to start appearing on EAST’s 4Q22/23 income statement.” Pakinam concluded
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