Imperial Brands have suspended all operations in Russia. That includes stopping production at the Volgograd facility, plus halting all sales and marketing activity. Operations in Ukraine have already been suspended to protect the wellbeing of employees.
In the last financial year, Russia and Ukraine represented around 2% of group revenue and 0.5% of underlying operating profits.
The shares were up 1.4% following the announcement.
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Our view
The decision to suspend Russian and Ukrainian operations will garner a lot of attention. But operationally speaking, these regions are a very small piece of the Imperial Brands pie and the broader investment picture hasn't changed much.
Historically smokers' willingness to pay ever higher prices meant tobacco giants were able to protect profits and grow dividends even as the smoking population dwindled. At the start of the year, the group announced a new strategy focussing on core tobacco markets and a more streamlined approach to Next Generation Products.
Helped by the sale of the Premium Cigar business, net debt has dropped to 2.2 times underlying cash profits, in line with the target of 2-2.5 times. That's also given management the confidence to start the slow process of re-growing the dividend.
With debt coming under control, profit growth is the main area of focus. Price increases over the last year have been able to prop up sales despite declining volumes. The groups new strategy involves focussing on five priority markets. Progress has been made in the US, UK and Spain but the group's losing market share in Germany and Australia.
Next Generation Products (NGPs) offer a potential future opportunity, and Imperial has primarily invested in vapour via its blu brand. Health scares and legislation in the US have severely knocked progress and sent growth into reverse. Management's responded to NGPs' lukewarm reception by exiting unprofitable markets, homing in on those with potential and exploring heated tobacco products. This will weigh on sales in the short term, but it's the right move if a narrowed focus helps the group build out successful cigarette-alternatives.
As the smallest of the four tobacco giants, rumours often swirl that Imperial will get bought out by one of the bigger players. This certainly isn't imminent though - and we think competition regulators would prove a major hurdle given the already high degree of market concentration.
The other important thing to consider with tobacco stocks is that many institutional investors can't, or won't, invest in the sector. This may mean that the shares are rated lower than the outlook for the industry really warrants, but it's hard to see attitudes changing and valuations recovering. Any investment case therefore has to be built around the dividend yield, which is substantial, even after the cut.
In the medium-term, Imperial can probably continue to squeeze more money out of fewer smokers. But further into the future, it's NGPs that will be driving this train. As it stands, that doesn't fill us with a lot of confidence. A prospective dividend yield of 9% makes the uncertainty more palatable, but as we saw last year, there's no guarantee it will remain so lofty.
Imperial Brands key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results (constant currency)
Imperial Brands reported full year revenue minus duties of £7.6bn, up 1.4% on last year at constant currency. Tobacco volumes dropped 2.9%, but a 4.4% increase prices meant tobacco revenue was up 1.5%. Next Generation Products (NGP) reported a 3.9% drop in revenue as the group exited several markets.
Organic operating profits were up 4.8% to £3.6bn as losses in Next Generation Products, like e-cigarettes, reduced by 57%.
An interim dividend of 48.48 pence per share was announced, and a final dividend of 48.48 pence per share was also announced.
Revenue in Europe was broadly flat year-on-year at £3.6bn. Strong performances from Germany and the UK was offset by slow duty-free sales and a declining German market share. Underlying operating profit was up 5.6% to £1.7bn, as losses in the Next Generation Product (NGP) business dropped.
The Americas saw a 9.6% increase in revenue to £2.5bn, helped by strong cigarette pricing and growth in market share in the US. Underlying operating profit was up 8% to £1bn. Growth in mass market cigar sales, tobacco pricing and lower NGP write-offs more than offset a £52m litigation settlement.
Africa, Asia and Australasia saw revenues drop 8.2% to £1.5bn, excluding the recently sold Premium Cigar Division. Underlying operating profit fell 4.7% to £598m as changes to the Australia excise regime proved to be an £88m headwind. NGP sales were significantly down as the group continues to divest in Russia and Japan.
Distribution posted revenue of £1.1bn, up 5.8%. Products continue to be distributed despite restrictions as governments classify the service as essential, with Spain and Italy recording strong growth. Underlying operating profits grew 11.3% to £265m.
Free cash flow of £1.5bn was down from £3.2bn in 2020, largely impacted by expected the timing of some tax changes. Net debt including interest and lease liabilities was down 16% to £9.4bn.
The group said: ''At constant exchange rates, we expect to deliver net revenue growth at a similar rate to FY21, while adjusted operating profit is expected to grow slightly slower than net revenue, reflecting the step up in investment in line with our five-year strategic plan and after taking into account the non-repeat of the US state litigation settlement costs.''
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