One of the best times to buy shares for the long run is when other investors succumb to emotional knee-jerk reactions to short-term news. For example, sometimes share prices slide when new policies are announced that seem to threaten a company’s operating landscape. For me, these are cues to scrutinize and uncover strategies that pave the way for healthy dividend returns.
Let’s zoom in on the recent share price slide of Eastern Company SAE (EC) from 15 Egyptian pounds in late February to 11.90 as of the 8th of April. This represents a fall of 20.6%. Based on prior year dividends, the current price of 11.90 provides a net trailing yield of 10.8% (12.1% gross, before a withholding tax rate of 10%).
What caused this sudden change in market sentiment?
The share price drop commenced in February 2021. The catalyst for the fall in share price was EC’s announcement that they were selling their Treasury Shares. Some 2.3% of company’s shares were repurchased by the company at the start of the COVID-19 pandemic (‘treasury shares’). These purchases were mandated by the Egyptian government to support EC’s price when markets collapsed in the initial stages of the pandemic.
The Company’s Board of Directors announced in February that they are selling the company’s treasury holdings. Company announcements were made (of both quantity and timing of the sale) and this resulted in downward selling price pressure, as some other investors decided to pre-empt the selling and get out first. In stock market parlance, the announcement had created a potential “overhang.” Shorter-term investors didn’t like that.
Then, on or about 21 March, an official announcement by the Egyptian government that a new cigarette manufacturing license (only one sole license will be issued regardless of number of bidders) would be up for sale and this could potentially terminate EC’s status as the monopolistic supplier of cigarettes in Egypt. This has kept EC’s share price at their current lower levels, some 20% below the February highs.
For more details, please refer to: Egypt introduces new license to produce cigarettes, Eastern Company comments
In my previous journals, I recommended EC as a BUY. The reasons were presented in:
I remain a BUYER of Eastern Company SAE (EC) at the current price level for the following reasons:
Based on the above, it is clear to me that EC will easily maintain its status as the dominant cigarette producer in Egypt for a very long time to come. Sure, a new player in the market would likely have an impact on EC’s sales volumes, but EC has strong government backing, as evidenced by the terms that NewCo is required to adhere to.
EC’s management response to the bidding announcement can be read here. They too seem unperturbed about the new license requirements.
Bidders were required to submit their offer by the end of April but this deadline was postponed indefinitely at the request of the bidders (refer to https://www.reuters.com/article/us-egypt-tobacco-idUSKBN2BR062).
I anticipate that the winning bidder may be one of the following international players:
No one knows who will get, or even if any new cigarette manufacturing license will be given out. So, at this stage I believe it is premature to speculate as to what the industry impact may be. One possible future risk is that one of the companies for which EC currently does contract manufacturing in Egypt wins a license of its own, which means EC could lose part of its of contract manufacturing business, in addition to facing direct competition. But, with the Egyptian government as the majority shareholder in EC we are very confident that it will not shoot itself in the foot, by undermining EC’s competitive position or destroying a significant part of its business. The risk is overblown.
On 22 March 2021, I attended a conference call with the management of EC — CEO, Hany Aman, and CFO, Mostafa Ahmed El Mahdi — to go over EC’s 2nd quarter 2020/2021 (quarter ended 31 December 2020) financial results.
Whilst the number of participants were not disclosed, I suspect there were fewer than 10 participants. My questions to the CEO on government cigarette duties and operating margins were given ‘air’ time. The low number of attendees is just what I like — with little attention given by mainstream financial markets analysts and investors, Egypt offers value.
The CEO’s answers were to the point. He had a grasp of the facts and stressed that EC’s policy is to reward its shareholders with dividends and that it is undisputedly an important company in Egypt’s growth (it aids government revenues through the smoking excise duties it collects and dividends it pays).
50.4% of EC is owned by Chemical Industries, a state-owned company. It is no wonder that despite announcing a new cigarette manufacturing license, the Egyptian government is protective of the industry and EC’s leading role in it.
Extracts from notes taken during my meeting with management and my thoughts are presented below:
The large 41% to 80% percentage gains in the prior quarter were as a result of supply chain disruptions from COVID in the quarter ended June 2020, and can be largely ignored as one-offs.
Note: EC has a financial reporting year-end of 30 June and their reporting format is to state their quarterly periods from the beginning of the financial year. Hence the current financial year’s (2020/2021) quarters are reported as:
It has been busy period for me. Amongst the many tasks of setting up the Fund is the setting up its brokerage account. As you are aware, I have elected to use EFG Hermes as one of my primary brokers.
Should you wish to open an account with them, kindly contact:
Ms. Norhan ElKhatib
Interest Claims and Account Opening Officer | Brokerage
Mention my name (and Double Digit Dividends Fund) and Norhan will assist you.
But I must warn you; like all account opening processes, it is complicated and time consuming. A list of the documents required for the Fund is provided below. It has required me to have 8 documents notarised and some additional 11 supporting documents. It is probably a more complicated task for me as I am opening an account for a company, rather than an individual, together with various custodian accounts.
I am presently also researching other brokers to ensure that the Fund is able to invest in markets that are not covered by EFG Hermes.
Finding quality double-digit yielding gems is hard work. Not only do you need to find them, you also need to be able to buy them! That is one of the advantages of subscribing to a Fund such as Double Digit Dividends – the account opening paperwork you require from us is kept to a minimum and we do the investing for you globally.
Not to scare you, but to give you an idea of the documents I had to prepare, here’s my list: