We attended the Eastern Company AGM on 28 Feb. 2017, where the company discussed the outcome of negotiations with Philip Morris International (PMI) – discussions began in October 2016 as FX pressures mounted for both companies (and given that +/-4% movement in the EGP-USD rate can trigger a renegotiation by either party).
Shareholders voted in favour of the following:
Change of tolling fee structure to two tiers (from three tiers currently), effective as of 1 March 2017:
- <15bn sticks: USD5.8/1k stick
- 15-22bn sticks: USD6.2/1k stick
- Receipt of tolling fees in their EGP equivalent for one year (through Feb 2018) until FX situation stabilises, and given that PMI does not repatriate its profits abroad nor does it export cigarettes
- Payment of late dues (cUSD80mn) to be received entirely in USD not in EGP (likely in instalments with 14.5% interest rate)
The decisions have no bearing on our forecast, as we had already assumed that the agreement would be amended in favour of PMI and, accordingly, we lowered the ceiling of the fees to USD6.2/1k stick in our last update published in January 2017. The risk is if there is another change in the agreement after the year passes. We reiterate our Buy rating for Eastern Co., as we expect the stock to continue rerating, as earnings growth momentum improves (following several rounds of recent price increases and on continued deleveraging).