• Earnings miss on negative margin surprise; still a Buy on valuation Eastern Co. (EC) published its detailed 3Q15/16 results today after disclosing KPIs earlier in April. Reported earnings came in at EGP271mn, growing 6% Y-o-Y. However, excluding EGP55mn in inventory provisions, EGP26mn in FX losses (the company likely depleted some of its USD cash assets for raw material purchases) and capital gains of cEGP6mn, recurring earnings inched down 2% Y-o-Y. Net profit missed our forecast 32%, mainly on weaker-than-expected margins. We remain Buyers of EC, as valuation is still very attractive (FY15/16 P/E of c6x) despite solid growth prospects driven by deleveraging and the likelihood of further price increases.
• EC’s own brands lead top-line growth; under-licence shows weakness Top-line for the quarter grew 3% Y-o-Y and was slightly below our forecast (-5%). Revenue from EC’s own brands grew c8% Y-o-Y, while under-licence revenue dropped c17% Y-o-Y, likely as consumers traded down to cheaper brands in a penny-pinching effort. The company is yet to provide volume details, but given the lack of price increases, trends were mostly volume-driven, in our view.
• Gross margin likely hit by devaluation; deleveraging benefits sustain Gross margin narrowed c6.1pp Y-o-Y, as raw material costs showed a c26% Y-o-Y increase, partly due to the impact of devaluation; the EGP devalued c16% since the last price increase in February 2015. Accordingly, gross profit fell 11% Y-o-Y and was 18% below our forecast, (the main source of the earnings miss). Meanwhile, SG&A costs (as well as the labour cost component of COGS) were flattish Y-o-Y; accordingly, EBITDA margin narrowed a slightly tamer c5.8pp to 27.3%, with EBTIDA falling c12% Y-o-y (-18% vs. EFGe). On a positive note, deleveraging momentum sustained, with net financing and leasing costs fell 31% Y-o-Y and were c29% ahead of our forecast.

Nada Amin
Hatem Alaa, CFA