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Not much spark at Imperial Tobacco

RESULTS: Cigarette giant Imperial Tobacco has suffered a tough six months as market share has fallen across all three divisions.
May 7, 2014

Cigarette giant Imperial Tobacco (IMT) insists its full-year profit targets are still realistic, despite a modest drop in earnings during the half year to 31 March. Planned stock reductions, a harsher regulatory environment in Russia and currency headwinds all contributed to a 5 per cent decline in core tobacco revenues.

IC TIP: Buy at 2,522p

The stock optimisation plan - which is reducing inventory levels in markets such as Iraq and Russia - cut adjusted operating profit by 4 per cent. But Imperial says it will provide long-term benefits, such as cutting the time it takes for cigarettes to reach consumers. Imperial's tobacco revenues would have risen 2 per cent but for the programme and adverse currency movements.

The group's progress in Russia was also hampered by the introduction of regulation prohibiting the advertising of traditional tobacco products. Overall, this led to a slight dip in Imperial's share of its so-called growth markets - those in which its operations are less mature. But, excluding Russia, market share was up, with particularly good progress recorded in Saudi Arabia, Vietnam and Cambodia. Imperial's share of more traditional markets also suffered, falling from 27.7 to 26.8 per cent. Economic weakness in France and Spain continues to dampen stronger performances in Germany and Australia.

Imperial will try to shore up investors' confidence by introducing quarterly dividend payments from 2015. The tobacco giant will also push further into the digital market, having launched its first e-cigarette Puritane in the UK via high street chain Boots earlier this year. The company gave no information on Puritane's sales performance so far. Nor was there news on the strategic review of the logistics business, which could be floated off as a separate entity.

Meanwhile, the company's large-scale cost-cutting plans look set to continue. Imperial wants to save £300m per annum by 2018, and is on track to whittle £60m out of the cost structure this financial year. So far Imperial has cut 900 UK jobs by closing its Nottingham plant; the Nantes factory in France faces a similar fate.

Broker Panmure Gordon currently expects EPS of 213p for 2014 - up from 210p in 2013 - but said it would trim its estimates by about 3 per cent in light of the results.

IMPERIAL TOBACCO (IMT)

ORD PRICE:2,522pMARKET VALUE:£24.2bn
TOUCH:2,521-2,524p12-MONTH HIGH:2,605pLOW: 2,106p
DIVIDEND YIELD:4.8%PE RATIO:37
NET ASSET VALUE:495p*NET DEBT:233%

Half-year to 31 Mar Turnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201313.483062.435.2
201412.764838.138.8
% change-5-22-39+10

Ex-div: 16 Jul

Payment: 19 Aug

*Includes intangible assets of £16.9bn, or 1,760p a share