Trading update shows Bomhard has much to do at Imperial Brands

“In the unlikely event that they didn’t know why Alison Cooper had scrapped her target to grow Imperial Brands’ target for 10% dividend growth a year and then stepped down from the CEO post shortly afterwards, shareholders do now after today’s messy trading update,” says Russ Mould, AJ Bell Investment Director.

“The forecast of a small drop in (adjusted) earnings per share for the year means the analysts’ consensus of a 3% decline is in with a chance of being right. But the company’s forecast of a 10% slide in the first half puts ever greater emphasis on the second six months of Imperial’s financial year to September and increases the risk of earnings disappointment.

Source: Company accounts, Sharecast, consensus analysts’ forecasts.

“Today’s update follows September’s profit warning and further trims the company’s forecasts:

  • Group net sales growth for the year to September 2020 is now expected to be zero, compared to a forecast of 2% last September
  • It now seems likely to Next Generation Product (NGP) sales will miss the goal of a 50% increase.
  • Low single-digit percentage revenue growth and faster profit growth from Tobacco, helped by strong trading in Europe and America
  • Adjusted earnings per share are now expected to come in slightly down rather than flat come in flat, with currency movements shaving some 3% of adjusted earnings per share, rather than flattering the number by some 2%

“As new chief executive Stefan Bomhard prepares to join Imperial Brands, he will have much to ponder looking at the list of setbacks which have affected the tobacco giant’s first-half results.

“They include the US regulator clampdown on certain flavours of cartridge-based vapes and related inventory write-offs, weaker-than-expected sales of next generation products (NGPs) in Europe and wholesale destocking in the US cigarette market, as well as a slightly-higher-than-expected tax charge.

“There is some good news, however. The core tobacco business is performing as expected, especially in Europe, where price increases are largely compensating for declines in stick (cigarette) volumes, and also Australasia. Even the US performance seems to be solid on an underlying basis and shareholders will be hoping that the £45 million vaping inventory write-down Stateside is just a one-off, especially as this is no bigger than the company had been forecasting in the autumn.

“Those shareholders who have stuck with Imperial therefore still face the question of whether the plump 11% yield and lowly forward price/earnings multiple of around 7 times both price in a lot of the bad news or not – and therefore whether the stock is a value trap (or not).

“Dangers still abound. Strong fund flows into stocks that pass environmental, social and governance (ESG) screens and away from names that are seen to be less ethical could mean Imperial Brands’ shares keep falling; regulatory pressure remains intense; and price increases may not be enough to compensate if stick volumes fall at a high-single-digit percentage rate.

“And yet tobacco remains a highly profitable and cash generative business. Imperial’s cash flow still nicely covers the forecast £1.8 billion annual dividend payment, even after capital investment, tax, interest and pension contributions. Price increases help to compensate for falling stick volumes. The long-awaited sale of the cigar business should further bolster the balance sheet. Even an unchanged dividend would mean investors are being paid to wait and see what happens, even if the consensus is for a 4% increase to 214.8p a share.

Source: Company accounts, Sharecast, consensus analysts’ forecasts.

“Shareholders will doubtless feel very, very uncomfortable holding the stock yet British American Tobacco entered 2019 under a similar cloud and its shares have advanced by nearly a quarter in the past 12 months.

“After two dud trading updates, the abandonment of the dividend growth target and a change in both chairman and CEO it may now take much for Imperial to surprise on the upside – if ESG fund flows give the new boss chance to prove himself, as they are moving even faster than consumers’ tastes.”

These articles are for information purposes only and are not a personal recommendation or advice.

The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.

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