Imperial sees boost as people up cigarette spending in crisis

Imperial Brands (IMB) has done well out of the great 2020 slowdown. The tobacco company said smokers spent more on cigarettes while travel and entertainment was shut down over the northern summer, with discretionary spending supported by government stimulus.

Imperial’s net revenue in the 12 months to 30 September was stable on last year, at £8bn, despite a plunge in vape, or ‘next generation products’ (NGP) revenue. Tobacco volume fell 2.1 per cent year-on-year, compared to a 4.4 per cent fall in 2019. 

Imperial cut its dividend in May in order to chip away at its debt and has announced an annual payout of 137.7p as expected from its interim results. This is a one-third cut from last year, but 14 per cent ahead of analyst consensus, according to RBC. 

Reported net debt came down more than £800m from the previous year to £11.1bn. This means gearing (adjusted net debt to Ebitda) is above the 2-2.5 times goal, at 2.7, but is an improvement on last year’s 2.9 times. 

New Imperial chief executive Stefan Bomhard said he would push for improvement from both the traditional and newer parts of the business. “I believe there is scope to enhance returns from our tobacco business and opportunities to strengthen our NGP delivery over time,” he said. 

The NGP division was a drag on operating profits, because of sales falling and a £124m write-down on unusable inventory. Imperial's adjusted operating profit fell 5 per cent on a constant currency basis, to £3.5bn. 

The operating performance was also hit by where people were buying more cigarettes: “We experienced a drag on our overall price/mix as a result of the fact that much of our growth was experienced in lower value markets with downtrading also evident”, the company said. 

RBC analyst James Edwardes Jones had been expecting more money going back to shareholders. “Our big hope was that the company would announce a share buyback to introduce some tension into the share price,” he said. 

Imperial had been trading at a 15-year low before the results announcement, which gave it a 6 per cent boost, back to almost 1,500p, a level not seen since June. 

Consensus estimates compiled by FactSet see adjusted earnings per share climbing 4 per cent next year, to 264p. 

Imperial sees the Covid-19 sales increase dropping off, while duty-free sales staying depressed for some time. The vape decline should also be worrying for shareholders. Sell. 

Last IC View: Sell, 1,512p, 19 May 2020