Eastern Company (EC) will be affected by the recently-announced round of increase in custom duties on nearly 500 imported items; customs on raw tobacco will increase to EGP9.0/kg from EGP6.1/kg. The change is effective starting 1 February 2016 and is expected to add cEGP150-165 million to the company’s annual cost bill, according to the company’s management. The increase in duties will have an immediate effect on EC’s costs as the company’s current c20-month tobacco inventory is stored in the Custom Authority’s warehouses. A back-of-the-envelope calculation confirms the company’s estimate as c55ktpa of raw tobacco are consumed by the company each year; the increase implies cEGP160 million in additional costs.   The added cost is relatively small compared to the company’s raw material cost bill of cEGP3 billion (c5%; c3% of total cash costs) and represents c12% of FY2014/15 headline earnings (restated). While the company will be affected negatively by the cost increase, we expect some ability to mitigate cost pressures, especially if another round of ex-factory price increases takes place. We remain buyers of Eastern Co. as the stock is still highly undervalued at 6x trailing P/E. The share price has fallen c13.3% YTD versus the local index’s 14.5%, which we view as unjustifiable, particularly given the defensive nature of the business, as well as its ability to mitigate devaluation, owing to its large raw material inventory, as well as USD-denominated fee business. (Nada Amin, Hatem Alaa)   Eastern Company: EGP148.09 as of 02 February 2016, Rating: Buy, FV: EGP295.00 per share, MCap: USD946 million, EAST EY / EAST.CA