After six months of its financial year, this tobacco giant is cautiously positive and expects a stronger second half. Our head of markets explains what the numbers mean.
Imperial Brands (LSE:IMB) continues to hone its offering to reflect a changing landscape, both by product and by geography.
There is every likelihood of an ultimately contracting market in combustibles and the group has seen the importance of investing in Next Generation Products (NGP) to offset this decline. Increased investment in what is still a loss-making category (NGP adjusted losses rose by 33% to £56 million in the period) has affected overall numbers, but some early signs of success are being seen.
Overall NGP net revenue increased by 19.8% in the six months ended 31 March, underpinned by growth of 35.1% in Europe, due largely to new product and market launches. The NGP unit comprises products such as heated tobacco and vapour devices, and increased investment in new regions as well as a more varied suite of options is already beginning to gain traction. The area is likely to be one of key importance in the years to come, which has been recognised by the industry, with the race to the top in full flow.
The more traditional tobacco business is still feeling the effects of a decreasing target market, Covid-19 normalisation patterns and the group’s Russian exit, all of which drove tobacco volumes down by 12.7% over the period.
However, tobacco remains a product which has inelastic demand, the ability to raise prices regardless and the pricing mix has seen the benefit as a result. Despite an overall volume decrease of 2.5%, price increases of 9.3% led to a positive impact of 6.8%, with falling volumes more than offset by higher prices.
At the same time, Imperial is also tailoring specific brands to specific regions, even within countries, which has had some positive results. In the group’s top five combustible markets, which account for around 70% of overall operating profit, further market share gains of 0.2% were achieved, with growth in the US, Spain and Australia more than compensating for declines in the UK and Germany.
At a group level, adjusted net revenue grew by 4.8% and adjusted operating profit by 7.3%, with net debt also nudging higher given the impacts of increased NGP investment.
At the same time, the level of debt remains well within the group’s parameters, as evidenced by comments that the previously announced £1 billion share buyback programme will complete in the second half, and with an increase to the dividend which boosts the projected yield to 7.6%, a punchy level by any standards and an invitation to income-seekers.
The outlook is cautiously positive, with guidance remaining unchanged but with Imperial on track to meet its profit targets. A stronger second half is expected as the full effects of price increases wash through, while the group also intends to attain cost savings of £150 million by year end, and is again on track to do so.
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The sector as a whole may be unfashionable, and indeed there are those who will simply not invest. Even so, from an investment perspective the shares’ defensive qualities have again been in evidence against a difficult backdrop, and a generous dividend yield has been a further bonus.
The race to dominate the burgeoning NGP market is one where Imperial’s size could work against it compared to its peers, but where progress is certainly being made as the landscape evolves.
The sector has variously been under pressure (British American Tobacco (LSE:BATS) shares have dropped by 21% over the last year), but Imperial has fared well, with the shares adding 10% over that period, as compared to a gain of 4.2% for the wider FTSE100.
The market consensus of the shares as a 'buy' confirms that the race is on and that Imperial is a serious contender.
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