Cairo - Mubasher: Pharos projects that Eastern Company could sustain a GPM margin of 35% and EBITDA margin of 32%, which is in line with the company’s ten year average, provided that gradual price increases would be enacted before current tobacco inventory dries up.
Eastern Company is trading at much more attractive multiples than peers. and if the company was indeed successful to sustain GPM in the range of 35% and EBITDA margins in the range of 30-32%, it would realize EGP 220 per share, which offers a 25% upside potential from the current market price.
The inelastic demand will reduce the volume shock due to price increases and reduce the time span for volume pickup post initial decline.
Eastern Company imports tobacco which represents the majority of its raw materials, which is c.60% of direct costs and c.40% of revenues. The company receives 15% of its revenues in US Dollars, thanks to some exports and the toll manufacturing agreements with international players, which reduces a portion of the exposure to exchange rate fluctuations to 20-25% of revenues.
The company generally keeps tobacco inventory for a period of two years, which had been the cushion the company relies on during the peak of the currency shortage and will provide a good buffer for margin stability until gradual price rises are enacted, the report indicated.
According to Pharos, the current tax brackets would still accommodate further price increases, which we estimate will happen gradually over 2017. Management had announced intensions to cultivate tobacco to reduce reliance on imports, but this would require some times to realize.
