Research that is free to access for all investors. Companies commission these providers to write research about them.
Brokers who write research on their corporate clients and make it available through our main bundle offering.
Research that is paid for directly by asset managers. Only accessible to institutional investors permissioned for access.
Event in Progress:
View the latest research on other companies in the sector.
HY results are in-line with estimates and there is no change to FY guidance apart from the inevitable change in FX, after that the rest of the results statement is details. Stefan Bomhard is to step down after five tremendous years, but Lukas Paravicini steps up from CFO so the transition will be seamless and there is no reason that any of the plans laid out at the recent investor event change at all. Importantly Therese Esperdy will stay on as Chair through the transition. The PER is just over 9x, the estimated yield 5.5% and the buyback has a very, very long way to run.
Imperial Brands PLC
Year to date Imperial Brands’ share price has outperformed three of the “Magnificent 7”. In the film – the 1960 one of course – four of the Seven died. Imperial continues to deliver what it said it would: modest but accelerating operating profit growth, lots of cash, buybacks and dividend growth. The performance of the shares is a function of that delivery, the economics of the buyback and, more than anything, a result of the valuation which remains too low.
The estimated PER is 7x, the estimated yield over 7% and the company is setting out on repurchasing a further 7% of its own equity. Trading is fine: cigarette pricing remains strong and losses in NGPs are reducing. Prodigious cash generation continues and shareholders are benefitting from both higher dividends (+4.5% for 2024) and a rapidly shrinking equity base. The company is doing everything right. We have long argued that within a decade the company stands a chance of having bought back all its shares, the illogical conclusion to a logical set of assumptions. BUY.
In the last Edition we set out again our view that the market has been consistently too bearish on the outlook for smokers, for revenues, for profits and for share prices in the sector. Having tested our arguments in a head-to-head debate against someone with very different views, we are even more reassured. There is continued growth in new ways of consuming nicotine, of that there is no doubt, but the regulatory hurdles are growing just as fast even if that is a spectacular own goal on the part of those purporting to be in Tobacco Control. The companies will continue to develop and change, but it is the continued resilience of smokers which remains the key to the sector. The company delivered in line with its guidance in 2023, and Q1/24 allowed it to reconfirm guidance for the current year too. Some commentators are convinced that there is material estimate risk, which is fine, but we struggle to see how anything which is being flagged by bears is an unknown to a well-established, experienced management team. The sale of shares in ABI to fund an immediate buyback offered a bigger emotional bang than BAT’s similar move with respect to ITC, and the share price appears to have been aided. Interestingly the shares now trade above the market’s average “Target Price” if our own is excluded, which begs the question as to why the market believes that a yield of 8.6% and an-ABI PER of 8x is “right”. Next October the company’s thirteenth Investor Day sees a return to Southampton, the site of the first in 1998. With the company having given guidance that the interim results will be lower year-on-year the importance of the results day has been lessened, but with the need for a stronger H2/24E performance the importance of a successful investor event has arguably increased further. That original investor event took a complicated story, gave it some focus, laid out the differentiated approach of the company and simplified the investment case. The same needs to happen this time with an audience just as sceptical as it was in 1998, but arguably with much less knowledge of the history of the company and the industry. The company has bought 93m shares since October 2022, 10% of its then issued share capital. This is the outcome from stabilising the business, no longer doing stupid things but also doing plenty of sensible things, generating some profit growth and enjoying the benefits of strong industry pricing. Debt has also been paid down, despite spending £1.7bn on its own shares. Our estimates shade lower with FX but with further modest profit growth will come yet more buybacks, albeit now at higher prices. The company has retired 10% of its shares but under reasonable expectations it can only do the same for another 10 years before it runs of out of shares to buy. Overly exposed to cigarettes, nowhere in vaping, still only just giving it a go in heat-not-burn after years of effort: everything about Japan Tobacco (as it is with Imperial) simply does not fit the conventional wisdom of the majority of analysts. And yet the share price chart looks like a nascent technology company in the midst of euphoria. Squaring the circle is not that tricky of course: the operational performance of the company has been good, benefitting in part from cigarette smokers that others have chosen to shun; guidance has been modest but has been achieved; Japan’s stock market has been in vogue; and local currency profits are being constantly aided by Yen weakness. It is a heady mix but with elements which are beyond our pay grade as a humble tobacco analyst. Relative to the sector the shares are more highly, but that does not mean incorrectly, rated. The continued, and impressive, growth of ZYN and IQOS inevitably garner the most stock market attention but, as it has been since the beginning of the company’s change in direction, delivery continues to be built on the resilience of the cigarette business. This is important to the rest of the sector: at times when PMI became a little too focused on the new and neglected the old, pricing could soften through a lack of focus. Now things are much more balanced, to the benefit of all. In addition, the focus on delivering in USD-terms as well as constant currency terms suggests that this, the thirteenth year of negative currency since listing, may be among the last.
IMB 2914 PM MO BATS
Since commencing share repurchases on 7 October 2022 the company has retired just under 10% of its shares. The commitment to on-going share repurchases is reiterated today. At an assumed 10% annual total return, the company will have retired all its shares in 10 years on sensible assumptions. Oh, and interim results were fine and there is no change to guidance for the year. BUY. Adjusted PBT £1,469m v PGe £1,457m / consensus £1,454m – The company has given and reiterated quite clear guidance for its expectations for profit development through this year and it has delivered. Volumes were weak as expected (-6%) but pricing and mix (at +9%) more than offset. Tobacco profit growth was modest (+1%) and aided by reduced losses in NGPs but that too was in line with guidance. The company expects a stronger H2, and who are we to doubt that given industry pricing trends. Logista had already reported a very good H1 performance, and so its outperformance is no surprise today, but a lower-than-expected interest charge is nice to see, with the benefit in H1 now in FY guidance. The dividend was increased by 4% as we expected, and the second decimal place has gone which is a welcome simplification. Purists can argue about individual elements if they wish, but as usual that misses the point. Estimates – We make no changes at this stage but even when we have indulged in changing 15 small assumptions we will still come out in the same place we are sure. Precision rarely trumps accuracy. What is most relevant is that the expected reduction in the average share count will contribute ~6% to constant currency EPS growth ceteris paribus. We do not include buybacks beyond those announced, but they will continue and can continue to grow in volume given the dividend savings made in repurchasing shares so cheaply. Valuation – The PER is ~6x and the estimated yield over 8% and growing. The Power of Ten – By last night’s close the company had bought back 9.56% of its original share count from the end of the FY/22, spending £1.7bn to do so. If it were a shareholder it would be #2 on its own register. Those repurchases can continue while the company continues to generate even modest profit growth, and the material restructuring and refocusing of the business under this management team, allied to continued strong pricing in cigarettes, means that is an entirely sensible expectation. Even assuming a 10% annual total return from the shares (with a yield which is 8% at the moment) the company will have, in theory, retired all of its shares with 10 years. That is a simply ludicrous conclusion from very simple assumptions: the outcome must instead be material share price performance. The company is buying at pace, institutions should do the same while you still can.
There were times, not that long ago, when Imperial trading updates would engender a frisson of excitement as to what mistake the management team had made now and needed to cover up with some form of accounting chicanery. Those days are now long gone. Since the management team led by Stefan Bomhard came together the company has very consistently set reasonable guidance and at least maintained it, and it has done so again today. Let the purists argue over percentage growth rates in vaping if they wish; the important points are that pricing in tobacco remains strong, profits will grow and shares will be bought back at pace. The forward PER of under 6x is discounting a future rather more bleak than the evidence shows, and the company is taking full advantage of that by buying its own shares. Constant currency guidance unchanged, F/X a touch harder – There has been no change to the company’s guidance for either the HY/24E period or for the FY/24E with the expectation remaining for modest profit growth at constant currency at the H1/24E stage and a stronger H2/24E to deliver a full-year outcome of operating profit growth “close to the middle of … mid-single digit range”. This is exactly as guided last November with the FY/23 results statement. The only change comes in F/X where sterling has strengthened and the headwind from translation is now put at a headwind of ~5% for the HY/24E and ~3.5% for the FY. Driven by tobacco pricing – Market share in the key five markets is “resilient” with US, Spanish and Australian share higher and the UK and Germany weaker. The company has never suggested that share would rise in all markets or that would always be higher, but it is aiming for stability after years of losses and it continues to achieve that. With stable share the company can benefit fully from industry pricing which each of the majors has every reason to continue to deliver. Pricing taken in the first half will underpin profit delivery in the second. NGPs – Are doing fine from a low base, the company is not being overly ambitious and losses are declining. That will do, nicely. Estimates – We have reflected current F/X into our estimates, but we have also reflected that in H1/24 the company bought rather more shares at a lower price than we had anticipated. In H1/24 the company spent £604m to buy 33.5m shares or 3.7% of the shares in issue at the start of this year. Since the start of repurchases to date it has retired 86.7m shares, 9.1% of the starting share count. This remains an important driver of EPS growth even allowing for higher interest costs and higher taxation. Valuation – The forward PER is under 6x and the yield ~9%. The market is discounting a miserable future for the company which the evidence simply does not support. Quite rightly the company is taking full advantage of that with is stock repurchases. Crashingly, Boringly, Good – Tobacco updates should be boring, that is what makes the sector great. Volumes decline, pricing rises, profits grow modestly, cash is generated, dividends paid and stock repurchased. Imperial Brands is doing all of that really, really well. The school of thought which has dominated the sector narrative since the 1950s (even before our time, honestly!) has been than smoking is coming to an inevitable end and that had meant ratings at paltry levels for much of the sector’s history. What is doing now is gifting Imperial the chance to materially reduce its share count on an on-going basis. It really is worth paying attention.
We know that few share our view that cigarettes will remain the most important driver of profits and profitability in this sector for many more years to come and so it is beholden upon us to not only give the arguments as to why we believe cigarette consumption will remain robust but also to challenge the narrative about the presumed rate of growth from new categories. We kick the tyres of the arguments in this start of year piece, reflecting on the fact that in 2023 the best performing stock in the sector was Japan Tobacco. For the current year we believe Imperial Brands will perform the strongest: its rapid retirement of equity is industry leading, its profit growth expectations none too shabby either. It would be easy to be bearish on Altria: cigarette volumes are declining; IQOS is coming; it has not been as good at vaping or modern oral as competitors despite a fortune being thrown at each. Despite it all we can still expect earnings and dividend growth, while cash generation means that while the last buyback of $1bn has been completed, another should be along soon. The company has spent $16bn on its own shares since 2011, retiring 16% of the starting share count but only 5% in the last three years. Shareholders have put up with a lot over the years, including dividend growth which has slowed to a snail’s pace: it is time to repay them by being more like Imperial Brands and being more aggressive in retiring equity while the rating makes it such an obvious thing to do. The impact of the (entirely right) exit from Russia would have weighed on this year anyway, but then there is yet another year of “investment” to deal with and sterling went and strengthened too. Growth and EPS expectations have stagnated, there is unlikely to be a buyback this year and dividend growth will be marginal. 2021 was meant to be a “pivotal year” but was not and by 2023 there was a need for yet more spending to achieve a “step change” but in what remains unclear. At the moment, BAT is growing its operating profit consistently slower than Imperial Brands and EPS at a much slower rate because Imperial is so good at retiring equity. BAT is cheap on any conventional metric, hence the BUY recommendation, but we are struggling as much now as ever to work out what the company is trying to achieve and what it thinks is in it for shareholders when it does. The company remains in need, still, of a clearer message. The track record for consistent delivery grows with each statement, the share count declines daily. The pace at which the company is retiring its equity, 5% last year another 6% this with more and more to come after that, exceeds the annual average 4% reduction which Swedish Match achieved from 2005 and we always said how good we thought it was at buybacks. The market’s short-sighted view of the longevity of profits at Imperial is gifting the company the opportunity to continue with its equity retirement to the point that in a decade the market will have waved goodbye to the shares. The only hurdle appears to be the dozen shareholders who tell us that they are determined to be the last holder. Imperial Brands is our nap stock for the year. The conventional wisdom easily writes off Japan Tobacco: carried out in its home market by iQOS; a slow delivery of a rival product; limited in vaping; over-exposed to cigarettes. And yet in 2023 the shares very easily outperformed its own market and its peers. The role of currency cannot be underplayed of course, but then it would be wrong to also dismiss the fact that operational performance also bettered expectations, especially in those deeply unpopular cigarettes. This year may be more difficult as currency cannot be relied upon and the Russian question has to be answered one day, but in the meantime hats off to the quiet performer. The company has been listed almost sixteen years and the US dollar has been a drag on EPS growth for twelve of them. At constant FX, EPS has grown at an average annual rate of 11%, but FX has averaged -7%. You would need a heart of stone not to feel some sympathy. At spot rates there may be some relief this year (and next) and so shareholders may see some of that constant currency growth delivered as actual earnings and perhaps even dividends. The rating relative to peers demands that there is earnings growth too, but in absolute terms it is no hurdle to a re-rating especially if growth is being delivered.
The FY 2023 performance was solid. Pricing was paramount to offset volume declines. The adjusted operating profit margin was up by 150bps, a sign that the strategic plan implemented following the arrival of the new CEO, Stefan Bomhard, is starting to yield results. We expect the consensus for FY 2024 to be revised upwards. The healthy balance sheet might allow a new buyback program during FY 2024
The joy of Imperial these days with its sensible management, rational targets, buyback announcements not tied to reporting and preclose statements after period ends is that results themselves become somewhat more academic. There will be a few, inevitably, for whom a few million here and there divisionally will be important but compared with the inexorable rate at which equity is being retired then that it not where the focus should be. On all too reasonable assumptions the company could, in theory, retire its entire equity in a decade. BUY: while you can.
No surprises in either the FY23 delivery or the FY24 outlook, albeit growth to be H2 weighted FY23 constant FX revenue growth of 0.7% (+1.4% ex Russia) is in-line with the Vuma consensus expectations for +1%. Combustible tobacco market share grew 10bps in the top 5 priority markets, with price/mix +11% offsetting volume declines of 10%, which were impacted by the exit of Russia and US mass cigar weakness. Adj EBIT of £3,887m (consensus £3,914m) and adj EPS of 278.8p (consensus 280.2p) are also essentially in-line. NGP net revenue of £265m (consensus £259m) was +26.4%, with +40% in Europe. Losses increased to -£135m in this business, due to increased brand support around new launches. This is the second consecutive year of revenue growth in NGP, following the reset of the group’s priorities. The dividend is raised 4% for the FY, and the share buyback for FY24, which has already commenced, is £1.1bn (+10% y-o-y). The outlook for FY24 includes low-single-digit constant FX revenue growth and to grow constant FX adj EBIT close to the middle of our mid-single digit range. Growth will be H2 weighted, with H1 adj EBIT to grow low single digit. Consensus looks for +4.1% adj EBIT growth in FY24, so we expect limited moves to consensus on the back of today’s results. Management hosts a conference call at 9:00am GMT.
Estimate changes: Imperial Brands (IMB.L, Price 1725p - Buy - TP: 2600p)
Long before the last smoker in the UK stops smoking, Imperial can have bought back all of its issued equity. £1bn last year retired 5.5% of the issued capital, £1.1bn can buy back 7.8% at the current price. And by “multi-year buyback” we do not believe that the company means just two years, more will come after this. Trading is fine, driven by pricing: the tobacco model is not broken, and heavy-handed, idiotic, infantile, unworkable regulatory intervention will not change that. The PER of just 5x discounts the end of smoking within years, but smokers are a hardy bunch and will be around for many decades, unlike the share count at this rate. BUY.
FY23 in-line; buyback to help support shares Imperial has issued a reassuring FY trading update this morning. As expected, strong tobacco pricing has delivered the guided increase in operating profit in the second half of the year. FX has moved slightly against the company, by about 1%. There has been another modest share gain in the top 5 markets during FY23, meaning there have now been gains in each of the last three years. This is evidence of the portfolio strategy working. Next generation products growth accelerated in H2, driven by Europe. Importantly, Imperial announced a further £1.1bn share buyback for FY24, which means that total capital returns in the current financial year are expected to be around £2.4bn, or 15% of the current market cap of £16.2bn. Given the recent share price weakness we think the buyback and in-line trading statement should be positive for the shares. FY23 results are due 14th November. Longer term risks associated with Tobacco remain; next generation commitments remain critical Yesterday’s announcement from UK Prime Minister Rishi Sunak that the legal purchase age for cigarettes in England will increase from the current 18 by one year every year had a negative impact on Imperial’s share price. The UK currently accounts for 13% of group sales, but this will phase out very slowly, and next generation products are an important component of the UK market. The UK government said it would also look at restricting some flavours and access on vapour products.
Despite falling short on the bottom line, the H1 23 results were in line with the street’s expectations in terms of the top-line and operating profit. The challenges posed by high comps and the effects of the COVID period significantly impacted tobacco volumes but this decline was effectively mitigated by pricing strategies. In our assessment, the market’s lukewarm response to the results can be attributed to a perceived lack of catalysts for Imperial.
The differing approaches of BAT and Imperial Brands are put in ever starker contrast with another set of results from Imperial which does exactly what was needed – deliver in line with no fuss, no angst and no need to worry that the management “gets it”. There is no change to operational guidance which has been consistent throughout, while the company continues to retire equity apace. £615m has been spent to date, cancelling 3.2% of the shares since last October, building resilience into prospective EPS (and hence DPS) growth. At a prospective PER of just 6x and a yield of 8%, the company is doing – and saying – all the right things. BUY.
Solid performance in H1 despite US NGP headwinds Imperial’s interim results are in-line to slightly ahead, in our view. Aggregate combustibles market share in its Top 5 priority markets is +20bps, while NGP revenue is +19.8% despite declines in the US. Adj EBIT grew 0.8% on a constant currency (vs. guidance of flattish) and the FY guidance is reiterated (though FX is now 50bps more favourable to EPS growth than it was at the last outlook statement). In tobacco pricing was strong at +9.3%, mix was -2.5% on product mix, and volumes were -6.8% (on an underlying basis ex Russia). Tobacco margins were +80bps. NGP growth was driven by Europe as the US is still affected by uncertainty amongst consumers & customers after marketing denial orders on its product there. The heated tobacco product is now available in 7 European markets. NGP losses were £56m, due to stepped up investments in new launches. The annual £150m savings target is on track for FY23. The dividend is raised 1.5% and the £1bn buyback, to be completed in FY23, is unchanged. CEO Bomhard reiterated the company’s commitment to ongoing share buybacks. Net debt/EBITDA is expected to fall to 2x by the end of FY23, leaving the company in a comfortable position to continue buybacks next year, we think. No surprises could drive shares higher We expect the shares will react positively this morning on account of the fact that there are no major surprises in the statement and the because the valuation remains very attractive (c.6x PE and 8%+ dividend yield). Consensus is likely to be unchanged. Management hosts a presentation and conference call for investors and analysts at 9:00am GMT.
The company’s trading update confirms guidance for the full year as set with FY/22 results released last November, the only difference being in a reduced benefit from sterling which should be no surprise. Once again the key is “robust tobacco pricing” now allied to “stable aggregate market share” with Imperial no longer offering the soft underbelly for competitors. The company continues to retire its equity apace having bought back 2.7% of its shares since last October. On a prospective PER of just 6x and a yield nearer 8% it is the right and sensible thing for the company to do. BUY.
Group is on track for H1, but FX drives a small downgrade Imperial states that it is on track to meet FY guidance, ahead of its interim results on 16th May. As a reminder this is for revenue to grow low single digits in constant FX. H1 revenue is expected to be slightly lower y-o-y in constant FX, or broadly flat excluding the impact of the exit from Russia. There is also a change in divisional structure for C&E European markets. H1 EBIT will be broadly flat y-o-y on a constant FX basis due to tough comps (COVID distortions), higher NGP investment and the exit from Russia, with growth in EBIT expected to be H2 weighted. Imperial has completed £523m of its £1bn FY23 share buyback. Net debt/EBITDA is expected to be near 2.0x by year end. FX is now expected to be a 2.5-3.5% tailwind on FY EPS, vs 5-6% previously expected. For H1 it will be c.6.5%. This implies a low single digit FX-driven downgrade to FY EPS. Tobacco share holding up Despite tough comps, Imperial’s tobacco market share across its top 5 priority markets was stable in H1, marking the second consecutive year of improving/holding share after many years of declines. The US, Spain, and Australia have grown market share, while Germany and the UK have lost some share – but in aggregate group market share has been stable. Step-up in NGPs The heated tobacco product Pulze is now available in seven European countries. The vapour product blu 2.0 has been launched in five new European countries. The modern oral product Zone X is performing well, supported by a strong marketing campaign. NGP revenue is expected to be higher y-o-y in H1, despite the decline in the US driven by the marketing denial order for myblu.
Imperial generates a lot of cash (about £2-3bn p.a. in FCF), enough to buy back its entire market cap in 8 years on our forecasts. The Board has announced a £1bn buyback for FY23, and management has committed to returning cash to shareholders in future years if there are no suitable alternative uses for the cash. Combining the current share buyback (c. 5% of market cap) with the dividend yield at 7.3% in FY23E makes for a very attractive income and capital appreciation story. While the Tobacco business has stabilised and started to improve, investors are rightly concerned about the strength of the Next Generation Products (NGP) business where Imperial has recently retrenched from some markets. It is encouraging to hear that the heated tobacco trials have been successful in the Czech Republic and Greece, and that the product will be rolled out to more established heated tobacco markets including Italy, Portugal and Hungary. Likewise, trials of the new blu 2.0 vapour product in France have been positive and Imperial will now launch this product into the UK market. We expect the company will turn its attention to the struggling US vapour business once these expansions are completed. Imperial is also committed to the high margin, high growth modern oral category, where revenue grew 37% in FY22. The NGP business in total grew sales for the first time since FY19 – albeit to a level that is still just 2.7% of group net sales. We raise our adj basic EPS by less than 1% for FY23E (to 295.4p) as sterling has strengthened since we last published forecasts. Our unchanged TP is based on a CY23E PE of 9x, a valuation level we think is appropriate for now given the uncertainties around the NGP business, but with buybacks supporting EPS growth, we expect future upward revisions to the TP.
Tobacco profit, adjusted PBT and adjusted EPS ahead of estimates; expectations for solid but accelerating growth in the current year; a share repurchase programme retiring more in one year than the company has ever done; a current year PER under 7x and a prospective yield over 7% on a payment twice covered by earnings. Sometimes it is easy. And in this case, it is. BUY.
Slightly better organic growth FY22 Tobacco & NGP net revenue is +1.5% on an underlying basis (Vuma consensus +0.8%); adj EBIT grew +1.8% on an underlying basis (consensus +1.2%). This is also slightly ahead of the guidance. Net debt/EBITDA is down at 2.0x, supporting the £1bn share buyback announced a couple of months ago. The dividend is raised 1.5%. Tobacco volumes are -4.7% (or -1.2% ex Russia), and Imperial took 35bps of market share in the Top 5 priority markets during FY22. Tobacco price/mix remained healthy at +6.0%, implying an acceleration to +10.7% in H2. NGP revenue grew 11% to £208m (consensus £212m). Imperial is now increasing investment in new product launches and market expansion for its NGPs, with Pulze heated tobacco expanding into Portugal, Hungary and Italy. Adj EPS of 265.2p is a 1% beat (consensus 262.7p), and grew +4.9% y-o-y. Outlook in-line with consensus The outlook anticipates low single digit constant currency net revenue growth over the next 3 years, with adj EBIT accelerating to mid single digit CAGR over the period. In FY23, profit growth is expected to H2 weighted, with H1 expected to be broadly flat y-o-y due to the phasing of NGP investment and the impact of the Russia exit. Consensus currently forecasts +1.5% net revenue growth and +2.6% adj. EBIT growth. This looks achievable in the context of current momentum and the outlook statement. Management hosts a presentation and webinar for analysts and investors at 9:00 GMT.
With the interim results last May we suggested that a buyback would be the icing on an attractive cake, and today the company has delivered. We suggested then investors should be buying the shares before they had to do so in competition with the company, but there is today at least as the company will be active from tomorrow. The PER for the year just started is under 7x before we consider exactly where to pitch the FX benefit (certainly larger than previously) and the buyback. But whether at the end of that the PER is 6.5x or 7x really misses the point. This is a company brought back to life by a new management team which is delivering strongly for shareholders and which has committed, quite rightly, to a multi-year share buyback programme. BUY.
H2 performed well Imperial confirms it has traded in-line with expectations during H2, and it announces a £1bn buyback to be completed in the first 12 months of FY23. Overall, the company expects to return over £2.3bn of capital during FY23, which equates to 13% of the market cap. Furthermore, it commits to returning excess cash to shareholders in the future after the requirements of a progressive dividend are met. The top 5 priority markets have seen improved market share, with revenue accelerating during H2. The return of travel across its markets has allowed demand to return to pre-COVID levels. The FY guidance of 1% organic sales and EBIT growth is unchanged. The company expects to maintain around 2x net debt/EBITDA over the medium-term. On our forecasts, Imperial is trading on 6.6x FY23E PE, well below the long-run average of 9-10x, with a refreshed management team that is starting to deliver. Buy reiterated.
Good H1 figures and the turnaround plan on track make the risk/reward tilt upwards given the recent underperformance against BAT. However, we continue to believe that IMB’s combustible focus strategy is not the right one and we see much more positive catalysts when looking at BAT.
The PER for the current year is under 7x and the estimated yield over 8% suggesting that the market either does not believe or does not care. Another set of results showing that performance is just fine says that the market should believe, while 17x being paid for Swedish Match (which is not that “growthy”) says that the market should care. The recovery in Imperial’s fortunes is continuing to plan under a management team which has set sensible targets and is delivering on them and where the strategy has been simply to stop doing stupid things and start doing sensible things. A buyback will be the icing on the cake, and it will come, but there is no value in waiting for the company to buy the shares when investors can buy them now. BUY.
Some good progress made in H122 The interim results are in-line on the top-line and a 6% beat at the bottom-line. Organic revenue was +0.3% (consensus 0.0%) and organic EBIT growth was +2.9% (consensus +0.8%). Imperial increased aggregate combustible market share in the top 5 priority markets by 25bps. NGP revenue of £101m compared to the consensus of £105m, with strong growth across all categories in Europe. Imperial is planning to roll out its Pulze and iD heated tobacco brands to more European markets. A completely new vapour product is undergoing a pilot in France. NGP operating losses reduced by 50% vs the year ago period. By region, AAA and Americas beat revenue and EBIT expectations while Europe missed on revenue and EBIT. Adj EPS of 113.0p is 6% ahead of consensus of 106.4p. Reassuring outlook The outlook is unchanged, and is in-line with the Vuma consensus. A recent price increase of +3.8% in Q2 implies a stronger price/mix over the balance of the year. Management is encouraged by the progress made under the new strategy and is optimistic about the near-term outlook. Net debt/EBITDA fell to 2.4x, as cash conversion remained strong at 102%. As a reminder, the Board is waiting for net debt/EBITDA to fall to 2x before initiating a share buyback. The interim dividend was raised 1% to 42.54p/share. Management hosts a webcast and presentation for analysts and investors at 9:00 BST.
FDA denies blu marketing applications After the UK market close on Friday the FDA issued a marketing denial order for a number of Imperial’s myblu pod-based vapour products. According to the FDA, Imperial’s applications lacked sufficient evidence to show that permitting the marketing of these products would be appropriate for the protection of the public health. Coming on the back of FDA marketing authorisations for Logic (owned by Japan Tobacco) and Vuse (owned by BAT) in recent months, this decision is especially humiliating for Imperial and will surely disappoint investors. The FDA is specifically concerned about a lack of sufficient evidence in the applications regarding design features, manufacturing and stability of the products. The applications also did not demonstrate that the potential benefit to smokers who switch completely, or significantly reduce their combustible tobacco use, would outweigh the risk to youth. This is not only a disappointing development but it also raises many questions. Does Imperial lack the technical and legal expertise necessary to put forward a successful application? Was it unaware of what the applications required, and if so, why (especially in light of it being a significant tobacco and NGP market participant in the US)? What is “plan B” for the US NGP business if key myblu products are taken off the market? Could this mean Imperial is ill-prepared to handle regulatory scrutiny in other markets? What does this mean for the company’s NGP strategy, which was due to ramp up this year? The company issued a brief statement expressing its disappointment and committing to the administrative appeals process. For now, we leave our forecasts unchanged. The FDA can choose not to enforce the marketing denial order while Imperial appeals the decision, which means sales of the products can continue. However, there is a risk that other Imperial vapour products will also be denied, and if Imperial is unable to reverse the decision it could lead to the loss of c. 1% of group sales. While this is not a huge number, the forfeit of future revenue in the largest vapour market in the world would be a significant symbolic loss. While the appeals process continues (likely for many months), we believe this will be a dark cloud obscuring the NGP story.
A suitably short and clear message from Imperial that trading is in line with expectations which have changed since the start of the year only to reflect the planned (and completely right) exit from Russia. FY net revenue growth is expected to be 0-1% (Russia costing about 2% of revenues) and adjusted operating profit growth ~1% (Russia making only a marginal difference). These might be modest expectations but the company today tends to load costs into reported numbers and so guidance is “modest but robust” rather than “fanciful and missed”. We prefer the new way. The loss of Russia as a market for the industry will reinforce the need for firm pricing in the rest of the world, while inflation will make manufacturers’ price increases easier to pass on. The rating based on company guidance is ~6x PER and a yield of 9%. That is too cheap.
FY22 off to a good start H1 adj. EBIT is 2% ahead of last year on a constant currency basis, and net revenue should be flattish. The FY outlook remains in-line with the revised guidance issued on 15th March (0-1% constant currency revenue growth). Adjusted EBIT growth is expected to be c. 1% for the FY. Tobacco pricing will step up in H2. FX is expected to be a 1% headwind on FY EPS (we are already incorporating this level of drag). The company’s new strategy is progressing according to plan. Imperial has grown its aggregate combustible tobacco market share across the top 5 priority markets. The consumer reaction to trials of heated tobacco product Pulze in the Czech Republic is positive. Imperial will provide an update on its Next Generation Product strategy at the interim results on 17th May. The market will be eager to hear more about this area of the business, following several years where competitors have gained ground. Imperial continues to negotiate with a local third party about the transfer of its Russian assets. It continues to support its Ukrainian colleagues with transport, accommodation and resettlement assistance. The balance sheet continues to strengthen, with net debt/EBITDA expected to be c. 2.4x at H1 (vs 2.6x at the year ago stage), with a further improvement expected by the end of FY22. The CFO has identified the lower end of the 2.0-2.5x range as the point at which the company could start to return cash to shareholders via buybacks.
We continue to believe that IMB is not necessarily a short-term strategic investment given the fact that the company is entering the second year of its “strengthening phase” with further investments which should weigh on margins, so no major improvement in the shareholder return.
Results modestly ahead of expectations; charges taken above the line when they need not have been; unexpected headwinds dealt with; debt reduced; a solid outlook statement which at least confirms estimates and potentially offers upside. Sometimes you have to pinch yourself and remember that this is Imperial Brands. Much has changed at the business and all for the better. The issue with Imperial was never the industry, it was gross mismanagement. That is being dealt with, but the rating reflects the past and not the potential. BUY.
Slight beat, but disappointment as no buyback announced FY21 adj EPS of 246.5p is very slightly ahead of the Vuma consensus (of 246.0p). Group adj EBIT of £3,570m was also marginally ahead of consensus £3,557m, with organic growth of +4.8% (consensus +4.0%). Organic net revenue growth of 1.4% (consensus +1.0%) was driven by price/mix +4.4% with tobacco volumes -2.9%. The beat was concentrated in Europe and in Logistics, with the US and Africa, Asia and Australasia slightly below expectations. NGP revenue of £188m (consensus £205m) was soft, as the company proactively exited certain markets and products. The heated tobacco pilot markets of Greece and the Czech Republic are on track, and we expect FY21 will be the low point for Imperial’s NGP sales. The outlook for FY22 assumes similar organic top-line growth as FY21, with organic adj EBIT growth slightly below net revenue growth, reflecting the previously flagged step-up in investment. Consensus was looking for just 1.3% organic EBIT growth in FY22, so we consider the guidance to be broadly in-line with where consensus is. Performance will be H2 weighted, given the comps and phasing of investment. Net debt/EBITDA fell to 2.2x, towards the lower end of the company’s targeted range of 2.0-2.5x. The dividend was raised 1%. We were hopeful that some early commentary on share buybacks might be revealed with the statement, but management has chosen to defer this announcement. With the shares trading on a CY22E PE of less than 7x, we think share buybacks are the most logical use of surplus cash, and expect an announcement in due course. A new head of ESG has arrived from Unilever. Management hosts a conference call at 9:00am GMT.
A year ago we highlighted the value of Imperial’s 50.01% ownership of Logista in respect not so much its contribution to profit and earnings but the impact of consolidation of Logista’s net cash and negative working capital on Imperial’s balance sheet. Logista’s 2021 profit performance reported this morning is a touch better than we might have hoped, a reverse from last year, but equally the high point of cash and of negative working capital from last year’s balance sheet have abated. When it comes to Imperial’s own results (due 16 November) we hope that the market and commentators fully appreciate that and do not misinterpret Imperial’s consolidated performance. In our view there is much going right at Imperial these days, with the share price lagging a long way behind the progress being made by the management. BUY.
Having a “preclose” statement after the period end is just one of the very many sensible moves made by the management over the last 18 months. Others have been to set targets which had a sensible chance of being met, and then meeting them, skills notable in their absence in not-too-distant times. There are even things which the company is charging to the P&L (US litigation costs) which would fairly be excluded elsewhere. The risks in Imperial’s investment case are materially reduced, while the risks to the sector are, once again, massively overstated by too many. There is enormous value here. BUY.
No surprises, limited impact on consensus The FY trading update is reassuring, with the company on track to meet full year guidance. Group net revenue is expected to grow by c. 1% on an organic basis, with continued strong pricing in tobacco products. The new focus on the 5 priority markets is beginning to stabilise the market share losses here to nearly neutral by the end of the financial year. At the group level, Imperial Brands is expected to grow market share by 20bps. Adjusted operating profit is expected to grow low-mid single digits in constant currency. We do not expect any significant change to consensus numbers, but sentiment may improve as the new strategy begins to deliver results. With regards to its NGP strategy, market trials are underway for its heated tobacco product, Pulze, in Czech Republic and Greece. In the US, the company has been trialling an improved marketing plan for blu. Feedback from both of these initiatives will be shared in 2022. Cash generation has been in-line with management expectations. We continue to think buybacks are likely to be announced sooner rather than later, given the share price performance and progress towards 2x net debt/EBITDA. The FY results will be released on 16th November.
FY guidance maintained Imperial has confirmed its FY guidance with the pre-close trading update this morning. Management expects to deliver low-single digit to mid-single digit organic EBIT growth, with constant FX EPS slightly ahead of the prior year. In H1, Imperial expects to grow net revenue by 1% on an organic basis and operating profit by ‘at least’ mid-single digits on an organic basis. Next Generation Products losses are moderating, as expected. Market trials in vapour and heated tobacco scheduled for later this year are on track. Imperial has increased its market share in the top 5 Tobacco markets, as planned. Gains in the US, UK and Spain more than offset declines in Germany and Australia. We note the US cigarette industry data released yesterday by Imperial showed the impact of beginning to lap the stocking-up from last year; we expect the US market will return to a more normal level of decline in 2021. Operating profit has grown nicely over the H1 period, and is expected to grow at least mid-single digit in constant currency in the half, helped by reduced NGP losses and strong Logistics profit development. Cash conversion remains strong, though – as previously indicated – the cash windfall from Logista in FY20 will unwind over FY21, resulting in FY adjusted operating cash conversion of 75-80%. The interim results will be released on 18th May. We are encouraged by the reassuring update and early wins from the new strategy.
IMB unveiled a five-year transformation plan that would see it increase investments in its top five cigarette markets, bolster its sales force, and take a more “disciplined” investment approach with its fledgling vaping venture. Overall, the announcements have improved the group’s credibility, but the lack of upcoming catalysts slightly disappoint. Not to mention, the disappointment also around the lack of an immediate share buy-back. The re-rating vs. tobacco peers in not for now.
Key announcements: subdued revenue target, no margin re-set, and a sensible NGP plan at last Imperial targets a 1-2% revenue CAGR and a mid-single digit EBIT CAGR over FY20-FY25. While these targets are not particularly stretching (the revenue target is only c. 1% faster than the average organic sales growth over the last 5 years), they appear achievable, thereby limiting further disappointments, and importantly do not require a major margin re-set to deliver. Back office and route to market savings will fund the additional marketing and sales investments needed to deliver the targets. Combustibles will drive the majority of the growth and there is a renewed focus on brands in the top 5 markets (72% of profit). Management provided some guidance for FY21 & FY22. Adj. EBIT will be flat y-o-y in FY22, following low-single to mid-single digit growth expected in FY21 (at constant currency), the latter a reiteration of previous guidance from November. Share buybacks will only be considered once the company reaches the lower end of its 2.0-2.5x net debt/EBITDA target, suggesting investors will need to wait longer than hoped (possibly until H2 of FY22). The market reaction was initially negative, which we believe was due to the buyback commentary, with the shares off as much as 5-6% following the release of the statement; the shares closed down 3%. However, we think the shares should outperform in coming weeks as the market recognises the good value and appreciates that the conservative targets leave room for upside surprise. NGP strategy tightened up Imperial will now participate in established NGP categories instead of building these categories from scratch, as they had previously done; this will result in more efficient investment with better payoffs. There are no specific targets on NGPs. Imperial will focus its NGP efforts on vapour in the US, UK and France, on heated tobacco in markets across Europe, and on oral nicotine (both traditional and modern) in the relevant markets in Europe. These decisions are based on management’s view of potential market growth and its existing capabilities in route to market. This means an exit from the largest heated tobacco market, Japan, where its route to market is rather weak; nor will it participate in the US heated tobacco market. The heated tobacco category is now more of a focus than it has been in the past. Its heated tobacco brand, Pulze, has trialled well in Europe and was characterised as “promising” at the CMD. There is no major additional investment required to make the product more competitive; it already benefits from a longer lasting battery and a less smelly vapour. (continued overleaf)
Comments from the new CEO, an outsider, indicate that the problems at Imperial stem more from organisational inefficiencies than a chronic lack of investment in the business. The CEO believes there is good data available across the group, but it has not been properly leveraged to the fullest extent possible; in his presentation he stressed “new ways of thinking” are needed. Improving focus was another area the CEO touched on several times in his presentation. This applies to both Tobacco (where the top 5 markets are now reporting to him on a monthly basis) and NGPs, where he believes the strategy around new product rollouts has been too lax. Ahead of the new NGP strategy announcement, we trim our NGP forecasts to reflect a more conservative rollout profile; this will probably be revised in due course. Despite the adverse product and market mix that weighed on margins in FY20, there were several encouraging datapoints in the year just gone. The volume share gains in Tobacco (+50bps at group level) reflect the strength of the brand portfolio. Pricing in the Tobacco business was also resilient across the year, in spite of COVID, with +6.7% in H1 and +6.8% in H2. In several markets, the blu brand’s market share is flattening out after months of share erosion. In the context of a c.6x FY21E PE, the magnitude of our EPS downgrade is basically irrelevant to the investment case. About half of the cut is due to technical factors, with the balance coming from temporary profit headwinds; we are still in the consensus range, albeit now at the lower end instead of the upper end. Imperial could conceivably double its share price through multiple expansion (and modest upgrades) if management can restore confidence. We like what we have heard so far from the new CEO, and await the appointment of a new CFO. Portfolio rationalisation is another lever for value creation, in addition to the organic improvements. We leave our 2,700p TP unchanged and reiterate the Buy recommendation ahead of the upcoming CMD.
Mixed feelings: the NGP beat should be welcome, as well as the transparency about FY21, but we believe that the decline in NGP investments should be a brake in the future and we are still concerned about the lower price/mix at IMB’s level.
The FY trading update in early October confirmed adj. EPS would be in-line with the consensus, as better top-line performance during the year was offset by increased COVID-related provisions. Cash generation has also been stronger than expected. Guidance on the recovery in NGPs will be important. Sentiment on Imperial is about as poor as we have ever seen, and we would not be surprised to see the new management team make some significant moves. We think Imperial should sell a slew of its small positions in emerging markets. These assets are low margin and do not confer a strategic advantage; they would be more valuable to other companies. In total, we think about £5bn of value could be unlocked from the portfolio, with the proceeds used to pay down debt and start buying back shares. We no longer believe Imperial should sell its NGP business or its Japan business. Having an NGP strategy is critical for maintaining a credible ESG philosophy, which investors now widely require. Complementary to NGPs is Japan, which is the largest heated tobacco market in the world. Thus we expect Imperial will keep both of those assets. We do not expect a sale of the high margin US business, either. Re-running our LBO maths suggests Imperial could generate a 60% IRR for PE on an IPO exit strategy and a 28% IRR on a managed liquidation strategy. Neither seems particularly likely to occur, but we note the maths are still compelling. We doubt investors would back an LBO down here, however. Although Imperial seems to be in a strategic vacuum currently, we are confident that there is value in the company’s assets that is not being recognised. We maintain our Buy recommendation ahead of the FY results next week and strategy update early next year.
Solid underlying performance, with external hires a positive The pre-close statement is reassuringly dull in terms of the implications for consensus. Importantly, guidance for FY20 is maintained. For FY20, management now expects adj. EPS to decline 6% in constant currency (previously -3% plus an additional 1-3% drag from COVID related impacts); though at the low end of the guidance range this is in-line with consensus. Better tobacco volumes and revenue have been partially offset by higher costs and higher provisions for stock & debtors. There is no analyst call today, but new CEO Stefan Bomhard shared some initial thoughts in the statement. He says he has “confidence in our ability to deliver a stronger performance in the years ahead.” He intends to lay out his strategy at a capital market event in calendar Q1 of 2021, which is earlier than perhaps some had feared. The next update will be the FY results on 17th November. Ahead of this, it is encouraging to see that Bomhard has brought in external talent to the Executive Committee. The new Strategy & Transformation Director, Murray McGowan, the new Chief People and Culture Officer, Alison Clarke, and the new Manufacturing and Supply Chain Director, Javier Huerta, have all come from well-known companies outside of Tobacco. It is a positive sign that Bomhard is able to attract solid talent into Imperial Brands. The CFO search is ongoing. Improved volume trends were observed in the US market and in several key markets in Europe. Tobacco revenue is expected to be +1% in constant currency. NGP revenue is expected to be -30% y-o-y in FY20, as investments have been significantly pulled back. This is a temporary move, and we expect to hear more about the plans for NGPs at the capital markets event next year. The balance sheet has been strengthened with cash generation ahead of expectations.
SAS: Styles & Screens, Imperial Brands, Electrocomponents, Mining: Copper, SSP Group, Luceco, Cons. Disc.: Dealspotting, Market Highlights
IMB RS1 LUCE TKO GLEN ANTO KAZ SOLG VCT IGG FEVR CDM YNGA MLC LOOK LP0
It has been roughly one year since we published our Recommendations to the Incoming Chair. In a short period, we believe the Board heard our feedback and took decisive action to improve Imperial Brands. We commend the plan to delever, to agree the sale of Premium Cigars, and to improve NGP discipline. Mr Bomhard, you have a great opportunity to build upon the Board’s momentum and to restore lost value by focusing on disciplined capital allocation and earning back the equity market's confidence. We detail our suggestion in this note. Reiterate BUY.
The dividend has been (partly) sacrificed to accelerate debt reduction. This may upset some income-driven investors, but longer term it should provide Imperial with more flexibility to invest, buy back shares and/or issue special dividends. An FY21E dividend yield of 9.0% is still attractive post the cut, and the net debt/EBITDA target of 2.0-2.5x is reassuring. Importantly, these actions, coming ahead of the new CEO’s arrival, signal a new sense of urgency at the Board and clear the path for Bomhard to consider a wider range of plans. The most pressing actions for the new CEO to take, in our view, are the following: 1) improve investor confidence in the guidance; 2) continue to streamline the asset base; 3) clarify targets for NGP and Tobacco; and 4) clarify the priorities for cash longer-term. These are well-known concerns; they have been communicated by shareholders and analysts to the company in the past, but the Board was slow to react. We hope now that there is a new Chairman and a new CEO, these concerns will be given the proper level of attention. There are more assets the company could (and should) sell. We applaud the sale of premium cigars and US OTP, but we believe there is more value waiting to be unlocked in various corners of the business. Investors are worried about Imperial’s competitiveness in the NGP arena, and the £95m impairment in H1 may fuel these fears. We are less concerned with the technology, which we see as comparable to peers, than we are about the strategy and execution. Priorities for this business, in our view, should be speed, profitability (which may necessitate some hard decisions), and focus. Operationally, Tobacco should fare relatively well during the crisis. Indeed, volumes -0.5% and price +6.7% in H1 is very solid; however, product and geographic mix was -5.3% and down-trading seems likely to continue.
Disappointing H1 driven by NGP. Reducing investments in this category was the company’s choice, but we believe it is a bad mid-term strategy. The dividend cut has finally shown increasing weaknesses vs. peers during the crisis.
Imperial Brands came out with broadly in-line results. Volumes beat with 114.6bn stick equivalents vs expectations of 111bn. Organic Tobacco and NGP revenue growth of -0.9% was in-line with the consensus of -0.7%, driven by tobacco growth of 0.9% and NGP declines of 43%, largely expected.
Results summary The big news is that the Board has cut the dividend by a third in order to accelerate the repayment of debt. Given the shares had been trading with a dividend yield above 13% for some time, this is not entirely surprising or unwelcome. The dividend policy remains progressive off this new lower level. The company targets net debt/EBITDA of 2.0-2.5x by the end of FY22. H120 adj. EPS of 103.0p is in-line with company-compiled consensus of 103.2p. Sales fell 0.9% on an organic basis (consensus -0.7%), with tobacco volumes -0.5% and price/mix -0.4%. Underlying EBIT fell -7.7% on an organic basis (consensus -6.7%). NGP revenue of £83m was worse than expectations for £112m, but reflected a period of high volatility in the category in the US market. Cash conversion remained strong at 103%, driven by a £445m working capital inflow. Adj. net debt rose £0.5bn to £13.5bn. Divisional detail Europe EBIT of £706m (consensus £725m) was hurt by lower NGP revenue and write-downs. Americas EBIT of £390m (consensus £355m) was driven by strong performance in Tobacco (vols -2.5%). Africa, Asia, Australasia EBIT was £287m (consensus £332m) as investment in heated tobacco in Japan offset strong Tobacco growth (vols +4.0%). Outlook implies downgrades of 3-4% The outlook is slightly more cautious, with the COVID-19 crisis expected to have a greater impact in its H2 due to downtrading and pressure on the travel retail business. Stock building flattered H1 revenue and profit by c. 1% and this should unwind in H2, such that FY20 EPS is expected to be lower than current consensus by a low single-digit percentage. A small impairment will drag on FY20 EPS by an additional 0.6% and the Premium Cigar disposal will be 0.3% dilutive. Management hosts a conference call for analysts at 9am UK time. Imperial is currently helmed by interim co-CEOs, Dominic Brisby and Joerg Biebernick, until the new CEO, Stefan Bomhard, arrives in July, so we expect the focus of the call to be solely on near-term trading.
Resilient Logista top-line, but higher costs imply a 2% headwind to our Imperial EBIT forecast Logista (N/R), Imperial’s European distribution subsidiary which generates 6% of group underlying EBIT, has reported interim results this morning. Revenue grew 5% and fee income was flat. Whilst the top-line is as we had forecast in our Imperial model, the operating margin is considerably worse due to incremental costs associated with operating under COVID-19 restrictions (which accounted for less than half of the drag) and changes in inventory valuations. The shortfall in EBIT vs our estimates is about 2% at group level in the half year. We make no changes to our Imperial estimates at this stage. The company is due to report interim results on 19th May, and we assume constant currency EPS growth of -9.4% in the period (and -2.2% for the FY), before the sale of Premium Cigars (c. 2% dilution to the FY) and today’s Logista results (a 2% headwind in H1). The period is likely to be affected by the withdrawal of flavours from the US vapour market, and ongoing disruption in that category following last year’s health scares. Given our (we believe) conservative forecasts and the resilience of the Tobacco category, which recent MSA data out of the US has confirmed, it is possible the company can offset some of these pressures with better trading. Tobacco-related revenue for Logista grew 7.8% in Iberia, 1.4% in France and 7.4% in Italy, demonstrating the resilience of the product during lockdowns. In any case, the temporary pressure on the Logista cost base does not change our investment view.
Tobacco & nicotine remain non-negotiable to consumers Imperial issued a brief trading statement this morning noting that it has seen no impact on its business from the coronavirus crisis. We continue to believe Tobacco will be a relative winner in this crisis, as the companies’ products are more defensive than many other categories of Consumer Goods. BAT recently gave a similar message at its CMD presentation on 18th March. Despite the reassuring updates from both Imperial and BAT, Imperial has fallen more than the FTSE 100 index year to date. It is trading on all-time low multiples: CY20E PE of 5.1x, EV/EBITDA 6.4x and dividend yield 16.5%. The new CEO is due to start on 1st July; we see plenty of low hanging fruit at Imperial and expect a much improved strategy (coupled with better communication) in due course. No balance sheet worries Imperial also announced a new €3.5bn (£3.1bn) RCF, which is currently undrawn. The company noted that it has a well-staggered debt profile. Imperial is currently building a level of safety stocks in case of any disruption to its business – this may have short-term impacts on working capital, which should reverse later. The distribution business in Italy, France and Spain has increased stock in its regional distribution hubs and continues to operate normally.
We remain confident that there is significant upside to be had from focusing the business further, eliminating non-core distractions and returning more cash to shareholders via buybacks. We also think investors want to see greater commitment to the NGP business – or at least clarity as to how Imperial intends to win in this area. We were encouraged to see that the Board is still considering disposals of non-core assets beyond Premium Cigars. Yesterday’s profit warning was attributed to the deterioration in the NGP markets in the US, and to a lesser extent Europe. This is likely to be a temporary slowdown as the vaping health issues have been largely resolved and the flavours ban will simply shift consumption to other products over time. The Tobacco business remains resilient, as we had expected. Australia has improved in H1 after the timing of shipments hurt last year’s results. We expect BAT will also issue reassuring 2020 guidance regarding its Tobacco business. Focus will likely shift in the near term to other NGP areas besides Vapour that are growing quickly and have received broad regulatory support across most markets – mainly Heated Tobacco and Modern Oral. Imperial has solid products in these areas, but does not communicate as much about them as peers do. Imperial is also the only big Tobacco company to have entered the cannabis market via a licensing agreement (and an option to take an equity stake in the future) with Auxly Cannabis Group. The first consumer products under the licence agreement launched in Canada at the end of 2019, and we understand early sales are ahead of expectations. Again, this is a potential growth avenue for the company that is rarely discussed. In summary, the long-term story is unchanged; we nudge down our TP to 2,950p (from 3,100p).
Troubles remain during the CEO transition process, with FY20 guidance revised downwards, due mainly to the US vaping crackdown. With low visibility on future earnings, cash flow and return to shareholders, stay away from IMB for now.
Imperial Brands have come out with a prudent AGM statement, taking the hit that was previously hinted at on conference calls related to NGP. This clears another cloud that overhung Imperial's shares.
Pulling back FY expectations Imperial has issued a pre-close trading statement covering its H1 to March. Management is revising guidance down to reflect weakness and volatility in the NGP business, due to the flavours ban on cartridges in the US and general negative newsflow on the products. FY constant currency sales are now expected to be flat y-o-y, from up slightly previously. FY adj. EPS is expected to be down slightly y-o-y, from up low single-digit previously. On the positive side, Tobacco trading has improved in most markets. Our estimates are under review, but we had been forecasting constant currency revenue +2.6% and EPS +2.2%, slightly ahead of consensus. Consensus is likely to come down by c. 2%. Longer-term outlook unchanged We believe pressure on the NGP business will be temporary and that consumers will continue using the products. 2020 is likely to be a disruptive year for the industry, but longer-term trends are unchanged. We expect companies will place greater emphasis on heated tobacco and modern oral in the meantime. H1 adj. EPS is expected to be down 10% in constant currency but finish the year only slightly down, reflecting the timing of inventory writedowns following the flavour ban. Portfolio change ongoing Whilst there was no announcement today about the Premium Cigar disposal, we find it encouraging that management says “We continue to consider the potential divestment of other non-core operations [beyond Cigars].” We expect the recently appointed CEO may take a sharper look at the company’s assets once he arrives.
Imperial announces new CEO from Inchcape Stefan Bomhard, currently CEO of Inchcape plc, will become CEO of Imperial Brands; his start date is not yet determined. Prior to Inchcape, Bomhard held senior roles at Bacardi, Unilever, Cadbury, Diageo/Burger King and Procter & Gamble. His wide range of experience across the Consumer sector is an asset that could re-invigorate Imperial’s internal culture. Likewise his experience across various geographies & channels, including emerging markets and Global Travel Retail, should prove useful. However, he has no experience in the highly regulated and fast changing world of Tobacco. Nevertheless, on balance we view his experience at various quality global Consumer companies to be a clear positive for Imperial shareholders. Imperial’s current CEO, Alison Cooper, has stepped down effective today; two divisional heads will act as interim CEOs until Bomhard arrives. What this means for Imperial’s strategy We note that Matthew Phillips has also stepped down as Chief Development Officer effective today. Phillips had been responsible for next generation product innovation as well as corporate and legal affairs. With the incoming CEO well known as a “marketing man” (he has a PhD in marketing), we expect a new strategy for next generation products is imminent. Imperial has been perceived – somewhat wrongly – as slower to expand in this area and we suspect efforts will intensify here. We would urge the new CEO to also consider divesting small, non-core and not very profitable positions in markets across Asia, Africa and Europe, and using the proceeds to pay down debt and buy back shares. Valuation still attractive Tobacco has had a modest bounce in the last few months, but we see further upside given the very low valuations. Our recent report [here] published last Friday examines recent developments in the sector.
While the results themselves were a slight miss, and generally underwhelming, the bigger news of the day was the appointment of existing Board member Therese Esperdy as Chairman and the £525m impairment of Cigars. Esperdy’s background is in the investment banking sector and she has been on the Board of Imperial since 2016. The Cigars impairment relates to dis-synergies in that business upon separation, and FX accounted for c. £300-400m of the impairment, which would reverse on a sale, so the impact should be less dramatic than it initially appeared. Management is guiding for FY20 sales and EPS to grow low single digits at constant FX. We assume constant FX sales of 2.6% and constant FX EPS growth of 2.3%. NGP sales are still expected to grow across the group despite the contraction in the US market, but specific guidance was not provided. The company will re-launch blu with more premium features in the coming year. Investment view. Imperial has a history of disappointing the market, and this is reflected in the lower than sector average valuation multiples. Steps have been taken to address shareholder concerns, most notably the decision to sell non-core assets and modifying the capital allocation policy to allow for buybacks. However, more needs to be done to improve credibility with the market, and we believe a fresh message from the new CEO – yet to be appointed – will help. In the meantime, we point investors to the CY20E dividend yield of 12.3% (assuming 5% y-o-y growth) and CY20E PE of 6.4x. This is the lowest rating in Imperial’s history. The US vaping market should recover in time, with the FDA having already voiced support for it multiple times, and new regulation in the US will likely be more benign than the market fears. Reiterate Buy on valuation; our 3100p TP is based on 11x CY20E PE.
Within this challenging year, the group reported a mixed set of FY19 results. While Tobacco remained resilient, the NGP disappointed as the category delivered lower than expected results, despite the group investing a lot in its development. It negatively weighed on operating profitability, which was actually -1.6% below consensus (but higher than our estimates). We see the more cautious guidance as more realistic, which is not a bad thing. The ambitions were previously too high on the NGP category.
Slight miss, new chairman and impairing Cigars Following the September profit warning, the big news in the FY19 results is the appointment of Senior Independent Director Theres Esperdy as Chairman. We appreciate she brings experience to the role, and has been on the Imperial Board since 2016, but our preference would have been for an external appointment. The results themselves are slightly below the recently lowered guidance. Although net revenue +2.2% in constant currency was in line, adj EPS -1.6% in constant currency disappointed (guidance was for flat), as NGP supply contract termination costs and other income were incremental headwinds since the September trading update. Only £55m of the £60m guided cost savings came through in FY19, with £60m to be delivered in FY20. NGP sales of £285m, +48% y-o-y, is in-line with the lowered guidance for around 50% growth. The FY20 outlook is for low single digit revenue and EPS growth; Factset consensus for adj. EPS is currently 289.7p in FY20E (+6% y-o-y), so we expect low single digit downgrades. Adjusted net debt was broadly unchanged from the previous year, at £11.4bn, and the dividend was raised 10% as previously guided; going forward the dividend will likely grow by less as the company focuses more on share buybacks. The share buyback programme resulted in £108m of shares repurchased in the FY19 year, with another £92m to be purchased by the end of calendar 2019. Imperial also took a £525m impairment on the Premium Cigars business, which is up for sale. The presentation and webcast will be held at 9am UK time. NGP investment cut for FY20 Both the US and Europe vapour categories slowed in H2, but blu still has leading positions at retail in markets including Germany, Spain and Italy. Pulze, Imperial’s heated tobacco product, is rolling out nationally in Japan, and will launch in more markets during FY20. Imperial took a £54m charge to terminate supply contracts, which led to the FY EPS miss. We are pleased to see management rein in NGP investment for the coming year, given significant uncertainty about the vapour market’s growth rate following the health scares in the US. The focus will be on oral nicotine, Pulze and cannabis products. Tobacco still delivering as expected Tobacco volumes fell by 4.4% over FY19 (an improvement from -6.9% at the H1 stage). Price/mix on Tobacco was +5.5%, and margins in this part of the business rose 60bps.
The pre-close statement suggested net revenue would grow around 2%, it grew 2.2%. The company said EPS would be flat at constant currencies, it declined 1.6%.
Last week, we cut our TP for Imperial Brands (BUY, TP 2900p) after its profit warning. Nestlé Health Science invests in Before Brands U.S. House of Representatives passes CBD banking bill U.S. House panel asks e-cigarette companies to stop advertising
Imperial Brands PLC Nestle S.A.
Earlier this year we wrote recommendations to the incoming chair. Since then we were pleased by management's decision to step away from its formal 10% dividend growth target and to initiate a buy-back programme. The shares responded positively.
The challenging NGP market in the USA and change in expectations of the results in Africa, Asia and Australia (AAA) has pushed IMB to warn on its next FY results. This is no major surprise, as we were already aware of the regularity issues in the US. While NGP products currently represent a small proportion of sales (between 5-10%), it is in this area that IMB focuses all its investments and sees its next growth driver.
Imperial Brands released a disappointing pre-close trading update. Net revenue is now expected to grow around 2% from the upper-end of the 1-4% range.
Disappointing development in the US Imperial has issued a trading update this morning, with FY19 revenue now expected to grow around 2% (from around 4% previously) and constant currency EPS growth now expected to be flat (from around 4% previously). The slowdown in the US NGP market is to blame, as are tougher trading conditions in Africa/Asia/Australia that had been expected to improve in H2 but have not. FX is now a 2% tailwind for the FY, so this will offset the downgrades somewhat. We expect consensus to be cut by 1-2%, but the impact on the share price will likely be greater, given BAT’s reiteration of its FY guidance only two weeks ago. Management hosts a conference call at 9am UK time. Longer-term strategy on track despite the warning Management reiterates that it expects to complete the c. £2bn of disposals by May 2020, after which point the business will be a more focused and streamlined operation. We note recent press reports regarding interest from Scandinavian Tobacco Group – though we also think CNTC would be a good fit for the cigars business. Tobacco growth outside of AAA is resilient, up low-mid single digits, and the AAA division will benefit in FY20 as some income in Australia shifts from FY19 to the next year. Imperial’s heated tobacco product, Pulze, is being rolled out more widely after its successful initial city pilot, and modern oral products are being launched in Europe. The £300m cost optimisation programme is on track to complete by the end of FY20. NGP segment under pressure in the US The NGP category has been affected by increased regulatory scrutiny, which has led to severe discounting by some competitors. More recently, the spate of vaping related pulmonary illnesses will not have been helpful. Imperial’s blu off-take has improved in H2, but NGP sales are now only expected to grow 50% in FY19 given the wider category slowdown. Ultimately, we expect regulation will favour larger players, so Imperial and BAT should eventually benefit – but the road is bumpy near-term. The FDA will announce its new rule on e-cigarette flavours “in the coming weeks.”
The structure of the £75m investment is a 4-year convertible loan to Auxly at a 4% interest rate. The loan is convertible into shares (worth 19.9% of the company at a price of C$0.81/sh, an 11% premium to the closing price) at any point over the 4 years; if it is not exercised by the end of the term, the loan will be repaid in full. Imperial will take a seat on Auxly’s Board, and the Chair of Imperial’s Product Stewardship and Health Group will sit on Auxly’s Safety Board, which will have oversight of the key aspects involved in quality control. Auxly offers Imperial a high quality management with relevant experience and a strong culture of regulatory compliance. Auxly’s operations span the entire value chain of cannabis, from growing to extraction, testing, product development etc. When we met with management recently, it was clear that Imperial views the highly regulated cannabis industry as sharing many of the same characteristics as tobacco. This investment fits with Imperial’s existing NGP strategy, which is to offer product solutions that deliver nicotine across multiple formats, with a particular emphasis on vapour. There are two Tobacco companies invested in the cannabis market: Altria and Imperial. We view Imperial as attractively priced, on 6.9x CY20E PE with a medium-term prospective EPS CAGR of 7% after incorporating modest buybacks. We are optimistic that a new Chairman – due to be announced soon – could bring a much needed fresh perspective to the company and its unique perception challenges in the market.
Impact of the new policy on adjusted basic EPS: FY19E 287.3p (from 286.3p +0.3%), FY20E 305.0p (from 301.2p +1.3%), FY21E 325.7p (from 318.5p +2.3%), and FY22E 350.2p (from 336.5p +4.1%). We adjust our model by revising down dividend growth in FY20E and beyond (to 5% p.a.) and assume £200m buyback in FY19E, £250m in FY20E & FY21E and £500m from FY22E onwards. We do not assume any disposals in our numbers, though we are confident these will complete in the guided timeframe. We expect management will seek to offset any potential dilution from these disposals; under our assumptions there is still significant headroom for additional buybacks beyond the level we model. Management is grasping nettles. Back in February 2018, we listed 12 ways Imperial could help itself [see: A private conversation]. The Board has now enacted 7 of our 12 recommendations. The only major action points outstanding are to narrow and raise the medium-term EPS growth guidance from 4-8%, and for management to buy shares. We are particularly pleased by the introduction of buybacks – given the share price level, we consider this to be the best use of cash at the moment. We await the announcement of a new Chairman, and expect further refinement of the group’s strategy after his/her arrival. Investment view. We leave our target unchanged despite the EPS upgrades; this still offers an implied 12-month TSR of 92.3%. The shares are deeply out of favour and we expect the re-rating will take some time. But we believe things are moving in the right direction, if somewhat belatedly.
Imperial Brands, Premier Asset Management, Real Estate Investors, Market Highlights
IMB PMI RLE IAG AF UTG MARS
Imperial Brands announced its intention to grow the dividend by 10% this year, followed by a progressive dividend policy, stepping away from its 10% dividend growth policy. The company is also announcing a share buyback program, which will return up to £200m by the end of the current calendar year.
We highlight key news items and our recent note on Imperial Brands. Former Commissioner Gottlieb warns JUUL may not be approved Scotch whisky production rules modified to allow new casks Tate extends distribution partnership with DKSH to Vietnam
IMB DGE TATE
We continue to believe Imperial Brands is one of the most attractive investment opportunities in Consumer Staples. It could be even better by restoring credibility and confidence.
Imperial Brands’ adjusted EPS came in at 71.2p, beating consensus estimates by 2.4%. Europe drove the beat, Americas was in line while the Middle East woes held back Africa, Asia and Australasia.
The company has reiterated that it expects revenue growth at or above its 1-4% range, with EPS growth of 4-8% provided disposal gains are included and the potential dilution of disposals is ignored. The revenue growth will not come in Tobacco where the company makes money, but will come in Next Generation Products where it does not. The first half will carry the costs of “investment” in “new stuff” which the company is confident will pay back quickly. It was similarly confident when it was investing in its Tobacco “brand equity” in 2016/17 but market conditions over took it and profits disappointed. Much is being taken on trust in estimates, with consensus still willing to include disposal profits without recognising it is probable that earnings will be diluted, as they have been with the selling down of the Logista stake. The valuation may not appear challenging, but BAT is cheaper and a much, much better business.
Last week, we reinstated coverage on Henkel with a BUY rating and €98 TP as we support the group’s renewed strategy and see the current share price as an attractive entry point. We also published videos highlighting our best consumer staples ideas for 2019 - ABI, IMB and RB.
IMB RKT ULVR BN NESN ABI UNAT
Tobacco In-depth, Brewin Dolphin Holdings, Joules, Great Portland Estates, Pets at Home, Hotel Chocolat, Market Highlights
IMB BATS JOUL PETS ASML JDW SNN MARS YNGA CTH GPE GFRD 0TY HCHOF
This report provides a review of key studies supporting the FDA’s menthol ban. After speaking to experts in Canada who published research on Ontario’s menthol ban, we map how US cigarette profits may react at the brand level.
Imperial Brands PLC British American Tobacco p.l.c.
Executive remuneration is a tricky area, especially when it comes to balancing long term goals and short term aspirations. Imperial tried to bring in a new remuneration policy in 2017 but it was never put to the vote. There have been attempts to revise the existing policy by changing weightings on targets and they continue this year. There is something of an improvement in some areas but too much emphasis is given, we believe, to revenue growth in NGPs as a target. The balance is still not right. Management has a route to getting paid. Investors may have to wait. More details inside.
As ever the headlines look fine, but it is the detail which is always the issue. The headlines say adjusted operating profit was flat or up 3% at constant currency. The company would like to call “underlying” performance +6% by excluding its choice to “invest” in NGPs, excluding the reduction in one-off income, excluding the one-off costs of Palmer & Harvey and excluding transactional F/X. That would be generous. The dividend is up 10%, as expected, and the company expects current year revenues to grow at the upper end (and possibly beyond) its 1-4% target growth range. The market has made the mistake of heeding revenue growth not allied to profit growth with Philip Morris. As a reminder 20% of management LTIPs are driven by NGP revenue growth this year with the weighting of adjusted EPS growth lessened in both bonus and LTIP awards. And there is another set of restatements to look forward to.
The company posted strong H2 results with a better than expected operating margin. The results were reassuring and suggest that the company has a clear view about possible threats and opportunities in the troubled tobacco space and how to navigate round them.
Imperial Brands’ adjusted EPS came in at 272.2p, beating consensus estimates by 1.1%. All divisions beat adjusted EBITA expectations excluding Return Markets South. The group expects to deliver constant currency revenue growth at, or above, the upper end of the 1-4% range for FY19. The medium-term guidance for constant currency EPS growth of 4- 8% remains in place. Today’s beat should reassure investors. Imperial is our top pick in tobacco.
The CFO bought shares last week, so it was improbable that the statement today would be different from “in line”. The question, however, is “how?”. The company wants the market to include “other gains” of £50-100m (£40m in H1) as part of operating performance while excluding “other losses”, for example the cost of Palmer & Harvey (£160m). We do not do that for other companies. “Price/mix” is stronger in H2 but as discussed before this is a balancing item not an indicator of genuine performance. So, for today, the headline is that the results will be “ok” but that is the same message as this time a year ago.
Imperial is on track to deliver growth in constant currency revenue and earnings in FY18 in-line with guidance. The tobacco business delivered much stronger results in H2 as guided at H1 results. Volumes for the full year will outperform the industry although H2 volumes are slightly weaker than the H1 level. This is more than offset by significantly stronger tobacco price/mix in H2 coupled with increased next generation products sales which combined will lead to revenue growth in-line with guidance. Cost savings will be slightly ahead of original expectations for £100m while other gains in operating profits are within the guidance range for £50-100m. Adverse FX subtracts 3% from FY18 earnings. Imperial is our top pick in tobacco. Reiterate BUY, TP 3100p.
Imperial Brands invests in medical cannabis company | Unilever acquires Italian personal care business Equilibra | Danone is exploring a sale of Earthbound Farm
IMB ULVR BN
IMB currently trades on trough multiples as the group nears the end of its multi-year transformation into a focused brand builder. We model that the US implements a nicotine standard from 2023 leading to a 40% fall in US volumes, yet still arrive at significant upside. In our view, IMB has ample IP, people and brands to take share in the fastgrowing vapour category. Strength in the US and Germany could catalyse shares. IMB is our top pick in tobacco. BUY.
Our initiation finds that in spite of increased regulatory risks, both IMB and BAT are Buys. Both companies trade at the widest discount to Consumer Staples in over 15 years, despite improving prospects. Shares are so depressed that we believe the market is discounting a nicotine standard far earlier than the FDA can reasonably deliver. Our base case assumes the US nicotine standard comes in 2023. We see significant upside on conservative assumptions.
The market initially responded warmly to the announcement that Imperial is looking to sell “non-core” assets which it believes will reap it up to £2bn over the next two years. What is being sold, and to whom, has not been disclosed and it remains to be seen what impact any disposals may have on the finances of the business. Meanwhile the operating profit performance of the business remains challenged. Much is promised for the second half of the financial year, as it was last year. The outcome disappointed then, and there remains a risk of the same happening again. We fear that the distraction of the mooted disposals has diverted attention from the continued shortfall of performance against aspiration. “Something must be done”, pursuing disposals is “something”. But the question is whether it is the right thing.
The numbers are slightly better than expected. We believe that the divestment announcement will particularly please investors, as it represents a significant capital to be redeployed to maximise the company’s value.
The first half year for Imperial is going to be another weak one, but the company believes that its second half performance is going to make up for it. This mirrors the guidance for last year, although then the second half fell short due to circumstances which were not previously anticipated by the company. When the company suggests that it is on track to meet constant currency net revenue and earnings expectations we presume that it includes one-off, non-trading benefits while continuing to exclude “one-off” costs but we do not. That, however, is only one reason why our estimates are below consensus. The company was not expecting much constant currency EPS growth this year even on its adjusted measure, and F/X will erode most of that. It still expects to grow the dividend by 10%, by further eroding cover. The mismatch between the lack of earnings growth and 10% dividend growth grows ever more apparent.
Russian dolls get smaller and smaller as you take them apart. Imperial feels much the same. The company has said that it should have been “a little more transparent” in the past and will offer greater clarity and transparency in future. This is clearly a transitional stage with respect to disclosure as it is only in the notes to the Accounts that we find that the company lost money in Russia last year. Our estimates are below consensus, partly because we refuse to include one-off positives while excluding one-off costs, but mainly because trading has consistently disappointed and we see no reason to believe that it is going to change. The estimated yield suggests that the market does not believe the company’s dividend growth aspirations. Nor do we.
Imperial Brands (IMB LN, BUY, T/P 5100p) announced a solid set of FY2017 results. Tobacco volume fell -4.1% less than the forecast -4.8%, total adjusted operating profit was in line with consensus at £3.8bn and adjusted EPS was 267p slightly below the 271p consensus estimate. Share momentum in priority markets drove H2 volumes.
FY update: tobacco’s net revenue was down 2.6% at constant currency (cons.-3.3%, H2: +0.1%) and +8.2% on a reported basis (FX: +10.8%) with volumes down 4.1% (cons. -4.8%, H2: -2.6%) and the price/mix +1.5% (in H2, industry volumes were down 4.5%). Growth Brands’ volume rose by +5.5% and gained an 80bp market share. By market and at constant FX, Growth Markets’ net revenue was flat at -0.2% (weaker H2 in Russia), whereas Return Markets recorded -4.5% (impacted by EU TPD and investments). The US recorded +0.3% in net revenue (a much stronger H2). The total adjusted operating profit was down 3.2% at constant currency and +6.2% on reported figures (in line with consensus). The dividend is up +10%. For the FY18, the company expects to deliver revenue and EPS at constant FX within its mid-term guidance (1-4% top-line growth and 4-8% EPS growth). IMB also expects to launch new e-vapor products in new and existing markets.
A year ago consensus had expected adjusted EPS of 278p for the 2017 year, before last year’s warning brought that expectation down. The company has reported 267p but that includes £114m of one-off items (£81m pensions curtailment in H2/17 after £18m in H1/17, ~£10m of exceptional gains in Logistics and another £5m somewhere else which we cannot find yet) or 9.5p per share, so the truly underlying outcome was actually nearer 257p allowing just for these. The F/X benefit was 23p according to the company, and so constant F/X EPS appears to have fallen around 6% (the company says -2%). In addition to the (largely) stated one-offs it seems that the performance in the US has been flattered by an MSA writeback which is unquantified at this stage but we would guess to have been around $100m. The company has flagged that it will be booking more “non-operating income” of £50-100m in the current year. We have excluded these from our estimates as surely is right to do. The PER may look “cheap” at 11.8x and the yield attractive at 6.1% but the EV:EBITA multiple excluding Logista is 11.8x for the current financial year and that is no steal. The PER reflects a low tax rate, the yield an unsustainable dividend policy. Some may be relieved it is not worse but we fear that estimates will remain under pressure.
Imperial Brands (IMB LN, BUY, T/P 5100p) released a trading statement this morning, which confirmed market expectations of around £8½bn for full year sales revenue. The company is due to release preliminary FY2017 results on 7th November 2017.
If all you care about is “meeting expectations” then Imperial’s statement says that it will do, in respect of earnings at least. For some that will be enough. Two factors are relevant we believe: what were those expectations and how are they going to be met? On the first point, the company had warned last November not to expect much for this year due to “investment” in the business and so this was going to be a year in which the company continued to underperform peers. Estimates had to be reduced, and materially so. On the second point the interim results included a pension curtailment benefit in the US and an exceptional gain at Logista which even Logista treated as exceptional. “In line” in quantum may not mean in line in “quality” and the company has an unfortunately lengthening history of including items which may not always be regarded as trading items in its definition of “adjusted” profit. Until we see the details in November we will hold the bunting.
Imperial Brands (IMB LN, BUY, T/P 5100p), whose flagship next generation product and e-cigarette brand is BLU, should receive some encouragement from today’s NHS Scotland release. NHS Scotland appears overall in favour of ecigarettes being used as a cessation product – i.e. an alternative to combustibles. NHS Scotland’s comments echo those recently made by Public Health England that e-cigarettes are up to 95% less harmful than combustibles.
Having presented at the Barclays Back to School Conference in Boston on 5th September, Imperial Brands’ (IMB LN, BUY, T/P 5100p) will update investors further on 28th September with a trading update ahead of its 30th September 2017 year-end. In our view, the core business is still robust, next generation products have momentum and key cash conversion metrics remain attractive.
Selling shares in Logista when it is trading on 15x consensus earnings to buy your own shares on 12.6x appears to be an entirely sensible thing to do but the fact is that the benefit of the reduced share count only offsets the dilution to estimates of an increased minority charge. The sum retained from the disposal, less than £70m net of fees on both transactions, is immaterial relative to either outstanding debt (£16.1bn ex Logista) or the dividend cost (£1.4bn). Apart from the short term benefit to share price of there being a material buyer of the shares over the next month, we cannot see the longer term value to shareholders of this financial engineering exercise. The company’s comments on trading have been taken as a confirmation of existing estimates we believe although the statement does not formally say as much. The dividend yield looks attractive but we maintain our view that ultimately DPS growth must reflect EPS growth, and there is an obvious mismatch on the company’s own expectations.
Imperial Brands’ (IMB LN, BUY, T/P 5100p) hosted an investor webinar yesterday, 27th June. Alison Cooper, CEO chaired the webinar with Amal Pramanik focusing on portfolio opportunity and Marcus Diemer on portfolio strategy. The emphasis of the webinar was acceleration of the principal growth brands, where the company targets 1%-4% revenue growth in FY2018. The webinar also included a deep dive into brand migration and rationalisation. Overall, we perceive the updates to be positive.
Imperial’s interim results followed the trend of the last few announcements in that the headlines did not quite tell the whole story. Once again the company included a number of one-off items within results which were otherwise “adjusted” for non-recurring items and once these have been re-adjusted for the underlying picture is somewhat more challenging. The company has stuck doggedly to its guidance for the current year in constant currency terms, but we question whether shareholders’ interests are necessarily best served by that being achieved. Surely the root cause of the warning about this year’s earnings was in previously running the business harder than the level of profit it could genuinely support. To repeat the issue so quickly risks a further “resetting” of estimates in due course we fear. The management has accepted that its medium term growth rate will lag peers, but what is true for the medium term is also true in the shorter term. Our HOLD recommendation reflects our fear that estimates will continue to drift, mitigated by the yield (as dividend growth will be the last target dropped) and a pragmatic acceptance that while we do not see corporate activity, others will speculate about it.
Imperial has announced that it is going to pursue asset sales to generate up to £2bn of proceeds over the next two years. If achieved that can support dividend payments in the short term, but does not address the fundamental weaknesses of the business we believe. There may be willing buyers of these assets but this is a small industry in terms of numbers of players and the assets Imperial looks to sell are unlikely to command the “strategic” multiples paid by, for example, JT for Natural American Spirit or to consolidate its position in Russia. In the meantime the company is promising a stronger second half performance. It needs to deliver but we fear that even low expectations could prove a challenge. The dividend yield should be something of a support, but the strategy for supporting that dividend over the medium term remains elusive.
H1 update: tobacco net revenue was down -5.5% on constant currency (in line with consensus) and +9.3% on a reported basis (FX: +14.8%) with volumes down -5.7% and the price/mix 0.2% (industry volumes were down -4.3% in the period). Growth Brands volume rose by +3.2% and recorded +6.9% net revenue growth at constant FX. By market, Growth markets’ net revenue at constant FX grew by +1.7%, whereas Return markets recorded -7.7% (termination of PMI contracts in the UK and Morocco + investments). The US recorded -6.8% in net revenue (industry volume decline of -2.5% + investments) and a flat adjusted operating margin at constant FX. The total adjusted operating profit was down -8.1% at constant currency and +5.7% on reported figures (in line with consensus). Tobacco’s operating margin contracted by 150bp. Growth and Specialist brands accounted for 60.4% of the Group’s tobacco net revenue. The interim dividend is up 10%.
Imperial Brands’ (IMB LN, BUY, T/P 5100p) interim results were in line with both our own and market expectations. Moreover, the company reconfirmed its expectations for the full year. Tobacco net revenue was in line with VUMA onsensus at £3.7bn (-5.5.% in constant currency). Volume fell 5.7% to 126bn sticks, which was slightly below both Whitman Howard and consensus. There is an analyst meeting and webcast at 9.00am today
Imperial had been quite open in warning that its first half year would be weak, and it has not disappointed. Total volumes were -6%; constant currency revenues were -6%; constant currency tobacco profits were down 8%. Fortunately sterling was weak and so in reported terms tobacco profits were +6%. But that sterling benefit is fading; from +14% when the 2016 results were reported to +9% now and at spot rates 2018 will see a return to a modest headwind keeping estimates under pressure even if the company is given the benefit of the doubt that the “investment” made in H1/17 will pay back in H2/17E as promised. The dividend is up by 10.0% again and that will be enough for some but the issue remains that the dividend growth can only be achieved by running down cover over time which inherently is a policy with an end point. The shares are essentially unchanged over the past 12 months and we are reminded ever more of the long period post the Altadis acquisition. We retain our HOLD recommendation.
Imperial Brands (IMB LN, BUY, T/P 5100p) is due to release interim results tomorrow morning, 3rd May 2017. Market and Whitman Howard expectations are for volumes to fall 5% to 127bn sticks with the returns market particularly weak.
Imperial lowered guidance for the current year last November and so its comment that “we are on track” should be seen in this light we believe. As previously guided H1 profits will be lower on a constant currency basis but sterling has been weak and so at actual rates profits will be “up strongly”. At the full year stage the company had made the same point about the benefit of sterling albeit that its reporting date coincided with sterling’s weakest point and the benefit, while still considerable at 13‐ 14% for the year has, at the margin, lessened. On a constant currency basis much needs to be delivered in H2 for the company to say that “guidance for full year earnings is unchanged” and in particular it needs a very rapid payback on discounting undertaken in the first half of the year. It may deliver, but estimates certainly already assume that it does and that this year is simply a “one off” year of investment. The risk is that the conditions which required a resetting of current year expectations are deeper rooted.
Imperial Brands (IMB LN, BUY, T/P 5100p) issued a trading update today, which overall matched current expectations for the half and full year. In particular, the company states that it is on track to meet earnings expectations for the half year results – due 3rd May 2017 – at both constant and reported exchange rates.
Imperial Brands (IMB LN, BUY, T/P 5100p) hosted an investor strategic update webinar yesterday, 21st March 2017. Alison Cooper (CEO) focused on “Quality Growth” reinforcing the sentiments from the Bristol investor day on the 8th June 2016.
Imperial Brands (IMB LN, BUY, T/P 5100p) is due to host an investor webinar on Tuesday 21st March 2017 at 1300UK. The webinar is part of a programme of more regular strategic updates. We expect it to echo the strong sentiments of its 8th June 2016 “Quality, Agility, Discipline” investor day in Bristol.
Imperial Brands’ (IMB LN, BUY, T/P 5100p) announcement of a mutual brand marketing tie-up with China government owned CNTC looks both imaginative and useful. However the amounts of upfront money involved – which typically drive market reactions to such announcements – appear minimal at this stage. Moreover, despite the size of the relevant Chinese, Russian and Ukrainian markets, initial volumes will probably be very small relative to the overall size of two of the world’s 6 largest tobacco manufacturers.
FY preliminary update: Tobacco’s net revenue is up +9.7% at constant currencies and +14.7% on a reported basis (FX: +5% positive impact of the weakening pound). FY Tobacco volumes were down 3% (Iraq & Syria impact of -1.5%) but Growth Brands volumes rose +4.3% (and recorded +10.1% revenue growth at constant FX and a +50bp market share gain). By market, Growth markets’ net revenue at constant FX grew +4.3% (+8% excluding Iraq & Syria), whereas Return markets recorded -2.7% (weaker Ukraine, the UK and Morocco). The US recorded almost double its revenue on the back of the acquisition of assets from Reynolds American and improved its adjusted operating margin by +270bp (good news). The total adjusted operating profit is up 10.4% at constant currency and +16.1% on reported figures. Tobacco’s operating margin expanded by 60bp. Net profit for the year is down to £669m vs. €1.69bn on the back of higher net financing costs (fair value and FX losses) as well as cost optimisations linked to the acquisitions. The dividend is up 10% (in line with mid-term guidance). The company announced a new cost optimisation programme which should deliver £300m of annual savings by 2020 (at a cost of £750m). Imperial will also invest £300m behind selected quality growth opportunities with a net impact of £200m in FY17.
Imperial Brands (IMB LN, BUY, T/P 5100p) issued a brief trading statement this morning in relation to the whole of FY2016. The company, which has a September year-end, states that it is “on track to meet full year expectations at both constant currency and reported exchange rates.”
IB reported its H1 results. The reported net revenue was up +15.4% (+2.5% on an underlying basis which excludes the +16.1% impact of acquisitions in the US, -1.8% impact of Syria & Iraq and FX -1.4% ). Tobacco volume was down -3.1% (-9.2% excluding acquired US brands, Iraq & Syria had a -3.2% impact on volumes). Reported tobacco operating profit margin was up +50bp. Growth Markets’ net revenue at constant FX was up +2.1% (+9.7% excluding Iraq & Syria), whereas the Returns markets delivered -0.5%. Growth Brands’ volumes were up +0.2%. Growth & Specialist Brands contributed to 58.6% of the revenue for the period. The EPS was down to 30.4p (vs. 89.5p last year) due to the amortisation of acquired brands and linked to acquisitions’ cost optimisations. The proposed dividend is up 10% (47.0p).
Imperial Brands (IMB LN, BUY, T/P 4200p) released interim results in line with market expectations at revenue and operating profit level with a beat on adjusted EPS. Revenue increased by 16.8% to £134m at constant currency while group adjusted operating profit advanced by 19.5% to £1,637m. Adjusted EPS was 113p compared with a Bloomberg consensus of 111p.
Imperial Brands (formerly Imperial Tobacco) released its Q1 trading update: tobacco's net revenue at constant FX grew +16.6% (+10% on reported figures). On an organic basis (excluding FX and the US acquisition), tobacco's net revenue grew +2%, or +4.3% excluding the negative impact of Iraq and Syria. Total tobacco volumes were down 3% and -9% on an organic basis (-4% attributed to Iraq and Syria). Growth markets reported net revenue down 2.5% (+7.2% excluding Syria & Iraq driven by the blu e-cigarette, excluding blu the growth was c.2.5%) whereas Return markets were up +0.3%. Growth Brands' volumes were up +0.4%. Growth Brands' market share grew 100bp. The group share was down 40bp due to shaving off some Portfolio Brands.
ITG released its FY results. Tobacco's net revenue at constant FX rose by 4.3% and was down 2.6% on a reported basis (-6.9% FX effect). By market, Growth markets' underlying net revenue was down 2.5% (+4.5% excluding Iraq and Syria), whereas Return markets recorded +2.8% in underlying net revenue. The US (reported separately from Growth markets) recorded +39.4% in underlying net revenue following the completion of the acquisition of assets from Reynolds American. FY15 volumes were down 3% and 5.6% on an underlying basis. By brand, Growth Brands' volume increased +7.1% (+13.9% excluding Iraq and Syria) whereas Specialist Brands' volume was down 1% on an underlying basis. The group's adjusted operating profit rose to £3.05bn (consensus at £2.96bn), +2.4% on a reported basis and +6.8% on a constant currency basis. Tobacco's operating margin progressed by 300bp on a reported basis, whereas the adjusted operating margin progressed by 280bp. The group's adjusted EPS was up +4.5%. The proposed dividend stood at 141p (+10.1% yoy). ITG expects that the next quarter's results will be impacted by the situation in Iraq and Syria and strong comps for volumes, whereas H1 16 revenue should benefit from stronger relative pricing.
The Q3 update was distinctly mixed in our view. Organic sales growth was disappointing, which has been the long term issue at Imperial. However we upgraded FY 2015 EPS estimates by c2% due to lower finance costs and currency headwind, and the comments that the market share of the US acquired brands remains stable will be a positive surprise.
ITG released its 9M update. Net revenue at constant FX grew by +2% (consensus at 2.6%), -4% on a reported basis and 0% on an underlying basis. Total tobacco volumes were down 3% (consensus at -2%) on a reported basis and down by 6% on an underlying basis (partially due to the political and security situation in Iraq). Growth Brands recorded a solid performance with volumes +10% on an underlying basis and 14% on reported figures. It also increased its market share by 100bp. Specialist brands' sales grew by 3% in volumes on an underlying basis. Growth markets' underlying net revenue was down 1% (up +3% excluding Iraq), whereas Return markets recorded +1% in underlying net revenue. The company is on track to deliver its £85m savings in FY15 and dividend growth of 10% for the full year. ITG also expects a cash conversion of c.90% for the FY.
Underlying improvement.
