Imperial Brands expects results for the year just ended to be in line with expectations.
Growth in net revenue for tobacco and Next Generation Products (NGP) has improved from the small decline seen in the prior year. Volume pressures across the tobacco industry have eased in Imperial’s markets, and NGP growth is expected to land between 20-30%, thanks to a swathe of product launches.
Underlying operating profit growth is expected around the middle of the mid-single digit range.
Underlying operating cash generation continues to be strong. Net debt is expected to remain at the lower end of Imperial’s target range of 2.0-2.5x underlying cash profits (EBITDA).
The annual dividend is being raised by 4.5% to 153.43p. And for the current financial year, Imperial has committed to increasing total distributions to shareholders by 16.7% to £2.8bn
The shares were up 4.3% following the announcement.
Our view
Imperial Brands’ focus on tobacco markets, where it sees the scope to grab market share, is helping it paint a brighter picture than some of its competitors. Volume pressures have also been easing in some of these markets. And the nature of selling an addictive product means Imperial's been able to put through big price increases. When combined with impressive cost savings, profits are still growing steadily.
But tobacco companies can't fight the tide forever. Regulatory pressure and changing consumer preferences towards healthier lifestyles means we think there will be further challenges ahead.
That's why the entire industry's jostling for position in the up-and-coming Next Generation Products (NGPs) market, including products like heated tobacco and vapes.
It's not been an easy start for Imperial, and while a more focused approach to the NGP portfolio is starting to bear fruit, these products are still a relatively small part of the picture and are yet to turn a profit. It's too early to say if they can be a viable replacement for the shrinking tobacco business. First, we will need to see several years of high double-digit growth and demonstratable evidence of sustainable profit margins. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.
Cash generation has impressed consistently. That’s supporting generous distributions to shareholders and investment in new products while keeping net debt close to the lower end of Imperial’s target range of 2.0-2.5 times underlying cash profit (EBITDA).
We think shareholder distributions are an attractive part of the investment case, but could be sesnsitive to a deterioration in volumes if the decline in tobacco usage accelerates. The shares are on a future prospective yield of 7.5% and Imperial has also pledged to increase share buybacks from £1.1bn to £1.25bn, or otherwise put, a further 6.6% of the company’s market value.
All else equal that should provide further support to help both the relative valuation and the prospective yield. As long as forecasts are met they should be covered by free cash flow. But no shareholder returns can ever be guaranteed.
Imperial’s valuation lies towards the bottom of the peer group, a position that we see as somewhat unwarranted. We think that gap could close if it continues to make progress in its priority markets and execute on the NGP roll out. But with the industry still facing an uncertain future, negative publicity remains a risk to be mindful of.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
Imperial Brands’ overall management of ESG issues is strong according to data by Sustainalytics, but we have some concerns. The company has stressed its commitment to offer smokers a choice of potentially less harmful products. However, in 2023 next-gen products made up just over 3% of net revenue. The company is also involved in moderate controversies related to business ethics (including child labour and employee exploitation in the supply chain), marketing practices, and the social impact of its products.
Imperial brands key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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