ii view: Imperial Brands at five-month low after year-end update

Focusing on its top five tobacco markets and offering a dividend yield of 9%. Buy, sell or hold?

Full-year trading update to 30 September 2021

• On track to meet full-year expectations
• Expects organic net revenue to grow by around 1%

Chief executive Stefan Bomhard said: 

"We have made good progress in implementing our strategy through a sharper management focus, greater investment behind our priority combustible tobacco markets and new market trials in heated tobacco and vapour. 

“We are building a high-performance culture with the introduction of new more consumer-focused ways of working and have made a significant number of new hires to enhance our capabilities in key areas.  

ii round-up:

Tobacco company Imperial Brands (LSE:IMB) today detailed in line full-year trading, with adjusted sales expected to grow by around 1% given strong tobacco pricing.

Adjusted operating profit should grow by a previously guided low- to mid-single digit number, aided by reduced losses for its e-cigarette or next generation products (NGP) and increased distribution profit.

Imperial shares fell by more than 4% in early UK trading, having gained by close to a fifth since pandemic induced lows in March 2020. Shares for rival British American Tobacco (LSE:BATS) are up by around 6% over that time, while the broader FTSE 100 index has gained by close to 40%. 

Tobacco or combustible profit is expected to fall marginally compared to last year given increased investment costs and US state litigation settlement. 

In January, and under a relatively new head, Imperial laid out a series of new five-year strategic goals. These included a heightened focus on its top five tobacco markets, which generate just over two-thirds of its combustible operating profit and taking a more disciplined approach to its vaping/NGP products.

Overall tobacco volumes have proved in line with management expectations, with its total cigarette market share expected to expand by around 20 basis points. Customer insights are now key at its NGP business, with market trials for its heated tobacco proposition in the Czech Republic and Greece recently launched. 

Full-year results are scheduled for 16 November. 

ii view:

Separated out of conglomerate Hanson back in 1996, Imperial is today a UK Bristol headquartered tobacco manufacturer operating in over 120 global markets. It employs more than 27,000 people with its cigarette or combustible brands including JPS, West, Winston, Davidoff and Kool. Its portfolio of potentially less harmful Next Generation Products spans the three categories of vapour, heated tobacco and oral nicotine with both blu, Pulse and Skruf it three respective brands. As consumer preferences continue to evolve, management expects that by 2025 NGP will account for 20% of the total nicotine market.

For investors, moves by Imperial and its rivals towards NGP have been hindered since 2019 by concerns for their safety. The use of flavourings to enhance consumer enjoyment, and even possibly encourage new users, also put the industry under the spotlight. The potential for plain packaging in Europe should be remembered, while a previous rebasing of the dividend also proved disappointing given the sector’s prior reputation for perceived dividend dependability. 

Now, and under new management, a more focused approach is being taken. Market share gains for its five key tobacco markets are being pursued, while investments for NGP will be more selective. A rebased dividend also offers increased financial flexibility and scope to continue lowering group debt. In all, while ethical concerns will continue to deter many investors, a forecast and historic dividend yield of around 9%, even following the rebasing, is likely to remain attractive for many income seekers. 

Positives

• New five-year strategic goals being pursued
• Attractive dividend payment (not guaranteed)

Negatives

• Growth hopes for NGP previously dashed
• Ethical concerns leave many funds unable to invest

The average rating of stock market analysts:

Buy