Egypt’s Largest Cigarette Maker Reports Record Profit

(Bloomberg) -- Egypt’s largest cigarette maker, Eastern Tobacco, posted a 42.5 percent surge in profits for the year, beating estimates despite raising prices to accommodate the country’s new so-called sin tax.

Eastern’s net income for fiscal 2017-18 rose to a record 4.2 billion Egyptian pounds ($234.5 million) compared to almost 3 billion the previous year. The mean profit estimate of seven analysts surveyed by Bloomberg was 3.99 billion pounds. Revenues rose about 28 percent from last year to 13.4 billion pounds.

Its shares were up 0.4 percent as of 12:43 p.m. local time, with trading volume at almost 31 percent of the three-month daily average.

The country’s tobacco sector is one that has seen “almost no demand disruptions,” Mohamed Zein, an analyst at Cairo-based Beltone Financial, said. “If someone has an option to either stop croissants, chips or cigarettes, he will stop croissant and chips.”

That’s “why the company is in a good position to pass this inflationary environment successfully," he said.

The second biggest listed company on Egypt’s benchmark EGX 30 Index last year raised prices several times to cope with additional tobacco taxes and higher production costs. However, a temporary drop in sales volumes wasn’t enough to concern the management, which expected little impact from price hikes and targeted better profits.

The spike in the company’s sales and profits may be the result of wholesalers stocking up on cigarettes ahead of the price hikes that went into effect earlier this month, Zein said. The hoarding by wholesalers is common in Egypt and, in this case, may have boosted demand last quarter. The holy month of Ramadan this year came in mid-May to mid-June and usually sees a drop in demand as a result of Muslims fasting and abstaining from smoking during the day.

Eastern’s latest price hike for cigarettes came in response to the government’s implementation of an 0.75 pounds per pack tax to cover the costs of a new national health insurance plan.

The full year results are a welcome development for Eastern. The company is one of two slated to go first in the government’s planned sale of stakes of public sector firms on the Egyptian exchange. Another 4.5 percent of Eastern, in which the government holds a 55 percent share, is to be offered on the bourse. The broader program calls for the sale of shares in 23 public sector firms.

©2018 Bloomberg L.P.