We contacted Eastern Company’s management for some further clarity on the terms of the agreement with PMI: i) EC will receive the EGP equivalent of the PMI toll manufacturing fees at an EGP/USD rate of 18.0 for one year (starting 1 March 2017). Any changes to the agreement next year will only revolve around the FX rate (or return to payment in USD). The current agreement with PMI is valid until 31 January 2021; ii) Total unpaid dues of USD105mn (from 1 July 2016 to 28 February 2017) will be repaid in full in USD in March 2017; and iii) The repricing of the entire under-licence volumes at a higher rate once certain volume thresholds are reached no longer holds. PMI will now pay USD5.8/1k stick for volumes up to 15bn stick with additional volumes priced at USD6.2/1k stick, which implies an average fee of USD5.9 based on current annual volumes of c20bn sticks, which is c5% lower than our estimate, but our numbers will not change much, as we are using a lower exchange rate of EGP16.

Eastern Company: EGP199.50 as of 1 Mar. 2017, Rating: Buy, TP: EGP280.00/share, MCap: USD1,237mn, EAST EY/EAST.CA