Imperial Tobacco (IMT) is overhauling its management structure to position itself for long-term growth and, according to a third-quarter trading update, the changes are going to plan.
A new sales division has been established so that geographical regions are managed in terms of the strategic role of the market, rather than its location, and a marketing director has been appointed to lead brand development. A review of more than 250 cigarette and fine-cut tobacco brands has been completed and the cost savings programme, due to deliver £300m of savings a year from September 2018, is on track, with £30m of savings set for this year.
However, trading figures for the nine months to 30 June show volumes slid 7 per cent and revenue 3 per cent, compared with consensus forecasts for 6 per cent and 1.6 per cent declines. Conditions were challenging in the EU, where industry volumes fell 6 per cent as a result of austerity measures, rising unemployment and increased illicit trade, with Spain a particularly weak point. Outside the EU, weakness continued in eastern Europe, notably Russia and Ukraine. However, Imperial did report good trading in Asia Pacific, the Middle East and Africa, with improved market share across the regions. The tobacco giant expects a strong second half and is due to launch an e-cigarette style product in 2014.
Panmure Gordon says...
Imperial's valuation remains attractive in our view, trading on 10 times earnings for the 2013 calendar year and an enterprise-value-to-cash-profit ratio of 9. The dividend yield is 5.6 per cent and the free cash flow yield is 10 per cent. However, given the weaker-than-expected performance so far this year, we will have to make minor downward revisions to our forecasts. Buy.
Investec says...
We think residual downgrade risk may already be in the price, given the derating relative to sector peer British American Tobacco. We are wary of building a buy case purely on its low valuation, particularly as the gap is narrower than it looks when the appropriate adjustments are made. But, potential positive catalysts are building in the form of an impending new finance director, possible non core divestments and even an eventual take-out. We view Imperial's valuation as absolutely cheap for a multinational company with positive earnings and growth in cash profits. While the enterprise value discount to BAT isn't that big, the equity case on Imperial is underpinned by its highly attractive cash returns. Buy.
