ii view: Imperial Brands lowers profit expectations

As the debate regarding vape safety burns, Imperial considers cannabis. Can investors relax?

Full-year results to 30 September 2019

• Revenue excluding tax duties rose 3.9% to £7.99 billion
• Adjusted operating profit down 0.7% to £3.53 billion
• Adjusted earnings per share (EPS) down 1.6% to 273.3p
• Total dividends for 2019 up 10% to 206.6p per share
• Revised progressive dividend policy going forward

Guidance:

Lowered EPS growth from 4% to 8% previously forecast to low single digit (2019 down 1.6%)

Chief executive Alison Cooper said:

"2019 has been a challenging year with results below our expectations due to tough trading in Next Generation Products (NGP). We are implementing actions to drive a stronger performance in the coming year.

"Our resilient tobacco value creation model continues to produce high margin sales growth and is well-placed to deliver sustained profitable growth in the years ahead.

"Although we grew NGP revenues by around 50%, this was below the level we expected to deliver. Our delivery was also impacted by an increasingly competitive environment and regulatory uncertainty in the USA. Growth in Europe was also slower, despite achieving leading retail shares in several markets. We have taken the learnings from this year to reset our NGP investment plans for 2020, prioritising the markets and categories with the highest potential for sustainable, profitable growth. We will scale up investment as the visibility on returns and regulatory uncertainties improves.

"Our priority going forward is to optimise the profit and cash generation from our tobacco assets, while improving growth in NGP with greater discipline and a more tightly focused business model that will create long-term value for shareholders."

ii round-up:

Imperial Brands (LSE:IMB) sells its products in around 160 markets worldwide.

Its cigarette brands include JPS, West, Winston, Davidoff and Parker & Simpson. 

Its core vapour or Next Generation Product brand is blu, while it also offers Pulze in the heated tobacco arena and oral nicotine brands Skruf in Germany and Zone X in the UK. 

For a round-up of these full-year results, please click here. 

ii view:

The tobacco industry is now highly regulated. Major health concerns have seen governments in many parts of the world raising taxes and imposing restrictions on tobacco use. As such, the industry has increasingly looked towards alternative, or next generation products, considered to be less dangerous for consumers health such as vapor e-cigarettes. 

However, a debate on just how safe these alternative products are is now ongoing. The use of flavourings to enhance consumer enjoyment, and even possibly encourage new users, has also brought the industry under the spotlight. 

Imperial moved to diversify its NGP portfolio back in July, commencing a research and development partnership with Canadian cannabis company Auxly; strengthening its investment made in Oxford Cannabinoid Technologies in 2018. 

For investors, dividend income continues to prove the key attraction. However, disappointing NGP sales, regulatory uncertainty and group debt have pushed it to increase the way in which it can use cash, bringing an end to its policy of 10% dividend increases and giving greater management flexibility. 

For now, a prospective dividend yield in the region of 12%, although only covered 1.3 times by earnings, generates attraction. A fall in the share price of more than 30% over the last year alone and a single-digit forward price/earnings ratio (PE) below the three and 10-year averages also offers appeal. But for many investors, question marks over product safety and the regulatory outlook may prove an uncertainty too far. 

Positives

• Commenced an R&D partnership with Canadian cannabis company Auxly
• On track to realise business disposal proceeds of up to £2 billion before May 2020
• Attractive dividend payment (not guaranteed)

Negatives

• Earnings guidance for 2020 lowered
• Increased US regulatory uncertainty regarding Next Generation Products
• Revised dividend policy going forward

The average rating of stock market analysts:

Buy