Bristol-headquartered tobacco titan Imperial Brands’ (IMB) first half earnings beat consensus estimates thanks to a better than expected showing in Europe and a boost from growth in its e-cigarettes business.
The half year results demonstrate the resilience of the tobacco business and reassuringly, Imperial leaves its full year sales, earnings and cash generation expectations unchanged, also guiding towards an acceleration in growth in the second half.
However the lately unloved shares waft 4.2% lower to £22.29 on the news that regulatory statements in the US have tempered Next Generation Product (NGP) sales growth across the pond.
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With smoking in decline and the industry facing tougher regulation, notably in North America, the big tobacco companies including Imperial and bigger rival British American Tobacco (BATS) are pushing through price hikes to offset falling volumes.
At the same time, they are investing heavily in the development of Next Generation Products (NGPs) that give smokers a less harmful alternative to cigarettes.
PROFITS PUFF HIGHER
Results for the half ended 31 March from Imperial Brands, the maker of Davidoff, Gauloises Blondes and JPS, reveal operating profits of £1.62bn. That is slightly ahead of market estimates and on net revenue up 2.5% to nearly £3.7bn too.
Europe delivered the strongest performance compared to expectations and the Americas performed broadly in line with expectations, although Africa, Asia and Australasia disappointed with volumes down due to pressures in the Middle East which the company expects will reverse in the second half.
Cash generative Imperial also announces its 10th consecutive 10% hike in the dividend, raised from 56.87p to 62.56p.
WHEN I’M FEELING BLU
Although tobacco volumes declined by 6.9%, Imperial Brands’ top line was boosted by 245% NGP growth to £148m, driven by burgeoning sales of vape brand myblu.
CEO Alison Cooper insists that ‘change is creating opportunities for consumers across new categories and we have continued to build NGP revenues, while also delivering a strong underlying performance in the tobacco business.
'Last year, we significantly expanded our presence in vapour with new product and market launches and exited the year with growing sales of our pioneering blu brand.’
Significantly, Cooper believes her charge has ‘a significant additive opportunity in NGP as the relative size of our global cigarette market share means we have the most to gain and the least to lose from any cannibalisation of combustible tobacco.’
REGULATORY OVERHANG
Unfortunately, sentiment towards Imperial and British American Tobacco remains poor, since recent US FDA statements about potential changes to tobacco and vapour regulations.
These include possible restrictions on menthol and the level of nicotine in cigarettes, as well as changes to the regulation of cigars, an increase to the nationwide minimum age for purchase of tobacco and vapour products as well as other measures to prevent youth access.
Nevertheless, Cooper says Imperial Brands is ‘actively participating in the ongoing regulatory engagement, supporting the FDA’s evidence-based process, where any proposals need to be underpinned by relevant independent science.
'The positioning of our tobacco cigarette and cigar portfolios and the focus of our vapour activities leave us well-placed to manage regulatory changes and continue to develop our business.’
THE LIBERUM VIEW
Liberum Capital is staying positive on Imperial Brands, reiterating its ‘buy’ rating on the stock today. The broker states that ‘Imperial is our top pick in tobacco and currently trades on trough multiples as the group nears the end of its multi-year transformation into a focused brand builder. This “shrink to grow” strategy is driving better quality growth in key markets.'
