Imperial Brands market share shows signs of life

Imperial Brands (IMB), along with its peers, is facing difficult societal and regulatory challenges as traditional tobacco products continue to lose their appeal and governments get tougher on the health risks from smoking. But a five-year growth strategy, robust cash generation, and the continuing deleveraging of the balance sheet is delivering progress.

The company is 18 months into its transformation strategy, and is now in the “strengthening phase”.  A key part of this is a focus on the five priority markets (the US, UK, Australia, Spain, and Germany), which deliver around 70 per cent of operating profits, and the roll-out of a next generation products (NGP) strategy.

Imperial increased its aggregate market share by 25 basis points across its key markets, which represents good progress after an unimpressive period of performance on this front. Gains in the US, UK, and Australia offset declines in Spain and Germany, with the UK enjoying a 105 basis point uplift.

But there was bad news from the States following the year-end. In April, the US Food and Drug Administration (FDA) announced proposals to ban menthol cigarettes and flavoured cigars. This could stymie growth opportunities in a significant market. The company are currently appealing FDA marketing denial orders for some of its vaping products.  

As would be expected, NGP outperformed traditional tobacco in these results. NGP net revenue was up 8.7 per cent to £101mn, although this still equates to just 3 per cent of tobacco revenues. Heated tobacco products will now be rolled out across additional European markets. On the other hand, tobacco net revenue grew by just 0.1 per cent and volumes fell by 0.7 per cent. Prices were raised by 1.2 per cent in the period, with increases in the second quarter of 3.8 per cent.

When it comes to the balance sheet, Imperial has a big debt pile. The good news is that management is keenly aware of the need to reduce it, and is aiming for the lower end of a 2-2.5 times net debt to Ebitda target. Net debt fell by £1.2bn to £9.8bn in the half, driven by free cash flow.

Citi analysts said that “with the shares having lagged British American Tobacco (BATS) significantly year-to-date, the risk/reward is skewing to the upside”. The bank thinks that the chances of a share buyback later this year have increased on the back of these results. That may be so, and strategic progress and debt reduction is encouraging, but we are not yet convinced of the merits of an upgrade. Sell.

Last IC View: Sell, 1,605p, 16 Nov 2021