ii view: US vaping concerns hit Imperial Brands

by Keith Bowman from interactive investor |

A profit warning from Imperial Brands intensifies the debate on the outlook for vaping. 

Full-year trading update to 30 Sept 2019 ahead of final results

  • Full-year net revenue is now expected to grow at around 2%, down from 2.5%
  • Earnings per share expected to be broadly flat at constant currencies, down from up around 4%
  • Next Generation Products (NGP) business will grow net revenue by around 50%
  • Results will benefit from £30 million of other gains this year, down from £80 million last year

ii round-up:

Imperial Brands (LSE:IMB) brands are sold in around 160 markets worldwide. They include Davidoff, John Player, Rizla, Winston, Tabacalera cigars, Kool, Salem and USA Gold.

The group's Fontem Ventures subsidiary is focused on alternative vapour products or Next Generation Products (NGP). 

Imperial holds a leading global position in the fine-cut tobacco and hand-rolling paper categories.  

Its latest trading update ahead of full-year results in November proved to be something of a profit warning. 

Growing regulatory uncertainty and health concerns for its vaping products in the USA had hit recent sales, with the result that previous guidance for both revenues and earnings per share were lowered.  

The shares fell over 8% in early UK stock market trading. 

The group's more traditional tobacco business had continued to perform in line with management expectations, with low single digit revenue growth and higher operating profit forecast. 

NGP net revenue is still expected to grow by around 50% over the full-year, albeit down from previous expectations. 

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 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.  

For investors, in an era of ultra-low interest rates, divided income continues to prove the key attraction. A prospective dividend yield in the region of 10% grabs attention, although, only covered 1.3 times by earnings and not guaranteed, is at risk of being cut if conditions do not improve. After a fall in the share price of more than 30% over the last year alone and trading on a single digit forward price/earnings (PE) ratio below the three-year average, the shares do appear cheap. But for many investors, question marks over product safety and the regulatory outlook may prove an uncertainty too far. 

Positives

  • Annual cost savings of £300 million by September 2020
  • Disposal proceeds of up to £2 billion before May 2020
  • Attractive dividend

Negatives

  • Increased US regulatory uncertainty around vaping products
  • Net debt of £13.4 billion at half-year results compared to a current market value of £17.6 billion
  • Dividend cover of 1.3 times, below the three-year average of 1.5 times

The average rating of stock market analysts:

Weak buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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