EUR 27.31 For Business Accounts Only

No catalysts on the horizon; Upgrade to Neutral post sell-off

All about pricing and when to pull the trigger. Growth in Eastern has always been price-driven, as per capita consumption has been declining or flattish over the past 5 years. With the MoF pushback on Eastern’s last attempt to raise prices in Jul-18, we turn more cautious on the outlook for future price hikes. We lower our TP by 15% to EGP18.5/share, assuming a FY18-21 ex-factory price CAGR of 8% (vs. 21% in FY15/18 and 12% previously). Each +/-5% terminal ex-factory price would change our TP by +/-12%, all else constant. We upgrade our rating to Neutral, following the sharp share price correction since our UW call in Mar-18 (-28% vs. EGX’s -14%). The stock trades on a FY19e P/E of 10x vs. peers’ 12.8x, while offering a lower growth profile.

Lacklustre year ahead; base case assumes no price hikes. The fiscal budget for FY19 implies no plans by the MoF to raise tobacco prices this year, aside from the Jul-18 increase related to the hike in healthcare fees (EGP0.75/pack, growing EGP0.25/pack every 3 years to reach EGP1.50/pack). We look for earnings growth of 3% in FY19, as we see minor volume-driven revenue growth, on a flat EBITDA margin and lower interest income. We expect EBITDA margin to reach 39.1% by FY23e, up from 37.3% in FY18, as Eastern gradually resumes raising prices starting FY20e. Each +/-5% higher ex-factory price would change FY19e EPS by +/-11%.

No longer a dividend play; excess cash depleted. Post the EGP3bn one-off cash dividend paid in Jun-18, Eastern is only left with its FCF to pay in dividends, assuming no leverage. We expect a FY19 DPS of EGP1.25, implying a yield of 6.9%. Going forward, we assume the company will pay c92% of its FCF in cash dividends (c75% payout ratio), but that would still imply a single-digit yield until FY23e.

Government stake sale an overhang. The Holding Co. for Chemical Industries is working to divest 4.5% of its stake in Eastern (cUSD104mn), reportedly in 4Q18, as part of the government’s privatisation programme. According to the official gazette, the selling price will be set at +/-10% of the average price for the month prior to appointing the financial advisor (6 Sep-18). This would imply an average offering price of EGP18.8-22.9/share. With the low end of the range at a premium to the current market price, the stake sale could be challenging, in our view. Eastern’s trading liquidity has improved significantly (12M ADVT of USD2.7mn vs. USD0.7mn historically), hence, facilitates building positions in the name.