Tobacco maker Imperial Brands (IMB) was the biggest blue chip faller on Wednesday, the shares sinking 8.4% lower to £17.85 following a warning full year adjusted earnings will be ‘slightly lower’ than last year, and on flat revenue to boot.

Imperial Brands’ latest alert was triggered by the US Food and Drug Administration’s (FDA) ban on certain flavours of cartridge-based vapour devices, as well as the impact of weaker consumer demand for vaping products in both the US and Europe.

BOMHARD HAS MUCH TO DO

Today’s damaging profit warning demonstrates just how much incoming boss Stefan Bomhard, poached from global automotive distributor Inchcape (INCH), has to do to reignite growth at the hard-pressed JPS, West and Davidoff maker.

Following on from September’s profit warning, Imperial Brands has coughed-up another earnings alert within today’s annual general meeting (AGM) update.

While the core tobacco business had a good start in the first three months of the year, first half adjusted earnings per share is expected to be down roughly 10% at constant currency as the US flavour ban coming into force tomorrow has triggered a write-down of Imperial’s flavoured inventory.

The myblu vape device maker also cautioned: ‘Regulatory uncertainty and adverse news flow continues to affect demand in the US and Europe. We estimate this will result in significantly lower year-on-year Next Generation Products (NGP) net revenue as well as increased provisions for slow-moving stock.’

In order to mitigate some of these short-term headwinds, Imperial Brands is having to resort to another cost savings programme.

THE EXPERT’S VIEW

‘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,’ commented 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.’

Currently readying himself to join Imperial Brands, new CEO Bomhard has much to ponder looking at the list of setbacks which afflicted the tobacco titan’s first half performance.

Admittedly, tobacco remains a highly profitable and cash generative business, but regulatory pressure remains intense.

Furthermore, strong fund flows into stocks that pass environmental, social and governance (ESG) screens and away from so-called ‘sin stocks’ could mean the share price keeps falling.

‘There is some good news, however,’ added Mould. ‘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 £45m 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.’

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Issue Date: 05 Feb 2020