Shares in Imperial Brands (IMB) drifted up 1% to £17.55 after the tobacco-maker reported a 3.9% rise in annual sales and warned analysts not to expect much in the way of growth this year.
Chief executive Alison Cooper described the full year results as ‘below our expectations due to tough trading in Next Generation Products (NGP)’. Imperial’s primary next-generation offering is vaping products such as blu.
‘Although we grew NGP revenues by around 50 per cent, this was below the level we expected to deliver. Our delivery was also impacted by an increasingly competitive environment and regulatory uncertainty in the USA’.
LITTLE SIGN OF AN UPTURN
The core tobacco business increased annual sales by 1.1% to £7.7bn with volumes down 4.4% but prices up 5.5%. Revenues were up in the US and Europe, offsetting ‘challenging’ markets in Russia, Africa and Asia.
‘Asset brands’, which include Davidoff, Gauloises, John Player and Winston, increased their share of total sales by 1.4% to 66.1%. Margins on the tobacco business were also marginally higher.
The NGP business generated annual sales of £285m, an increase of 48% on the previous year, but changes in US government attitudes towards vaping and greater discounting by competitors meant the result was short of management expectations.
The outlook for the current year is ‘more cautious’ with revenues and earnings per share (EPS) expected to grow by low single digits, excluding any gains from disposals such as the premium cigar business.
Performance ‘is expected to be weighted to the second half’, which is usually code for ‘don’t hold your breath’, as the NGP business is re-focused on the markets which offer the best growth prospects.
PRICED FOR ZERO GROWTH
While the results were far from sparkling, the valuation of the shares - which have been bumping along close to 10-year lows of late - implies little to no growth going forward.
Based on Reuters Eikon data, Imperial shares are trading on just six times the consensus forecast for current-year earnings against nine times for British American Tobacco (BATS), 16-times for Philip Morris International and 18 times for Swedish Match.
Analysts at UBS go one step further, observing that six times earnings is a 70% discount to the rest of the European Consumer Staples sector which implies ‘the market does not view the current earnings profile as sustainable, and (Imperial) will be unable to compete effectively in NGPs’.
