Al Eqbal Investment Company, formerly known as the International Tobacco and Cigarettes Company (ITCC), was established in 1992 as a public shareholding company focusing on the production and distribution of tobacco products. In 1998 ITCC signed an agreement with Phillip Morris International to locally produce and market L&M cigarettes and the arrangement later expanded to include the Marlboro brand in 2002. These agreements helped increase ITCC’s share in the local market to 40%.
The prospects for ITCC’s cigarettes business looked very promising as the company’s sales grew by more than 170% between 1998 and 2002. In subsequent years, sales began to experience a decline, mainly on the back of a 40% decline in exports sales as a result of intensifying competition in Iraq, which constitutes 90% of ITCC’s exports. In order to offset the declining cigarette business, the company’s management decided to search for profitable alternatives. The opportunity presented itself in Al Fakher Tobacco Factory, a company based in the United Arab Emirates (UAE) that specialises in the production and distribution of flavoured molasses, which was acquired for $11m during 2006. Al Fakher, a leader in its market, played a crucial role in opening a new segment for the company, with sales increasing from JD6m ($8.47m) in 2006 to around JD99m ($139.85m) in 2013. The company then decided to enter the field of renewable energy, where its subsidiary Al Taif Investment imports and sells photovoltaic cells and systems.
In the wake of Al Eqbal’s acquisition of Al Fakher, manufacturing methods were upgraded by installing state-of-the-art machinery and the automation of the factory’s production lines. This enabled the firm to offer its products to the market with consistency in quality and packaging. With its brand standing out for its quality and wide variety among a number of competitors, such as Al Nakhla Tobacco (Egypt), Al Waha (Jordan) and Layalina (UAE), Al Fakher currently operates and sells in more than 100 countries.
Al Eqbal’s positive outlook is based on medium-term prospects for flavoured tobacco or molasses, which is expected to account for 100% of operating revenues going forward and remain encouraging, as the pricing environment that helped sustain revenue growth trends remains intact. The industry’s business model is fairly straightforward, with volumes being the key driver of revenues while cost-cutting continues to add leverage to operating profits.
In addition to expectations of strong top-line trends, there is little in the way of cost pressures to divert revenue growth from earnings. Since the company tends to hold several months of semi-processed tobacco inventory, which is the largest raw material input cost, the impact of raw material price fluctuations is usually smoothed significantly. The implications of this stability in Al Eqbal’s largest input cost are unlikely to put pressure on margins in the foreseeable future.
Cash Generation & Return
Al Eqbal has strong and predictable cash generation. With limited merger and acquisition opportunities in the foreseeable future, a solid debt-free balance sheet, and relatively modest capital expenditure requirements, it is more likely that Al Eqbal will continue to return excess cash to shareholders in the medium term. Al Fakher’s market share still has room to grow, and although official market share figures for the flavoured tobacco segment are not available, industry observers are confident that Al Fakher can continue expanding, especially when considering the fact that the company has not yet focused on major markets, such as Turkey.
Like all other tobacco and cigarette producers, Al Eqbal is sensitive to higher taxation on tobacco-related products and increased smoking restrictions, in addition to a stronger US dollar, which could also weigh on the company’s top line. However, in the case of Al Eqbal, these risks are relatively manageable given the broad geographic diversification of the company’s revenues and the size of the still untapped markets that Al Eqbal has yet to enter and grow into.
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