Imperial Brands full-year trading statement: Thursday 5 October

“Imperial Brands’ shares are down by nearly 10% over the past year and the share price has stumbled of late, although the planned dividend payments and share buybacks mean the total return looks less forbidding for those investors who do not automatically ignore the stock on environmental, social or governance (ESG) grounds” says AJ Bell investment director Russ Mould.

“Even those investors who do not run strict ESG screens must continue to ponder the long-term future for smoking in the wake of a respiratory virus pandemic; the ongoing regulatory pushback against the industry; and Imperial’s own efforts to adapt to the possibility of a brave new world by developing its next-generation products (NGPs). Imperial continues to look to market share gains, price increases and changes in sales mix to offset the ongoing decline in global stick-equivalent (SE) volumes.

“There have also been reports that the UK Prime Minister is considering a ban on smoking, to be introduced in a similar fashion to that of New Zealand, whereby the age at which smoking is permitted gradually rises.

“In response to these market dynamics, Imperial Brands continues to run chief executive Stefan Bomhard’s five-year plan, launched in January 2021 after a string of profit warnings, managerial upheaval and a dividend cut. Its key goals are:

• A focus on five key markets in tobacco, namely the US, Germany, UK, Australia and Spain. They generate more than 70% of group combustible products’ profits.
• A reset in next generation products, to stem initial losses and build for long-term growth.
  
• Simplify group operations to save £100-150 million in costs a year and fund increased investment in core brands to the tune of £50-60 million a year.
• Drive net sales higher by 1-2% a year out to 2025.
  
• Hold operating margins in the near term and then generate mid-single digit percentage organic profit increases between 2023 and 2025.

“Although the full-year trading update may not provide maximum detail ahead of the actual final results on 14 November 2023, analysts will also assess this statement in the context of the guidance given for the year to September 2023 by Mr Bomhard alongside last November’s full-year figures and then reaffirmed alongside May’s first first-half results, since when the company has maintained a fairly studious silence, barring June’s analysts’ meeting in New York:

• An increase in group revenues and profits on a constant currency basis for the year, despite ongoing declines in SE volumes.
  An increase in sales from Next Generation Products for the full year.
• Broadly flat first-half profits on a constant currency basis.
• A 6.5% benefit to first-half earnings from currency movements and a 3% gain for the whole year.
• A £1 billion share buyback.

“The FTSE 100 firm’s array of key brands, which includes JPS, Davidoff and Gauloises, still confers some degree of pricing power, despite regulators’ restrictions on packaging and advertising. Last year, “Imperial Brands compensated for a 4.8% drop in stick equivalent volumes to 221 million with a 6% increase in prices (of which 1.2% was due to brand mix). Analysts expect a further 3% drop in volumes this year to 203 million.

“For the full year to September 2023, analysts are currently forecasting the following:

• Stated net revenue growth of 6% to £9.4 billion, including NGP sales of £256 million (against £166 million last year).
• Adjusted operating profit of £3.9 billion against £3.7 billion.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts on Vuma. Fiscal year to September

“Attention will then switch to the balance sheet. Net debt has come rattling down, thanks to the €1.1 billion sale of the premium cigars business and also organic free cash flow. Net debt increased in the first half of the year, thanks to the ongoing share buyback programme, higher capital investment and increased inventory, but management has continued to target reductions in borrowing.

Source: Company accounts. Fiscal year to September

“Lower debt and strong cash flow are important as they reduce risk and also support the dividend. The dividend cut of 2020 is now fading from memory, as Imperial has increased its dividend for two years in a row and launched a £1 billion buyback. Analysts expect an increase in the full-year dividend for 2023 as well, although Mr Bomhard and his team are unlikely to discuss that until November.

Source: Company accounts, Marketscreener, Vuma, consensus analysts' estimates. Fiscal year to September

“Add the forecast 145.7p full-year dividend and the buyback together and Imperial is set to return the equivalent of around 13% of its market cap to shareholders in cash.”

Source: Company accounts, Marketscreener, Vuma, consensus analysts' estimates

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