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Imperial Tobacco - results on track

Charlie Huggins | 19 August 2015 | A A A
Imperial Tobacco - results on track

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Imperial Brands Group Ordinary 10p

Sell: 1,691.00 | Buy: 1,692.40 | Change -19.20 (-1.12%)
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Imperial Tobacco has issued a trading update for the nine months ended 30 June 2015. Underlying tobacco net revenue was flat and volumes were down 6%, held back by on-going security issues in Iraq. Excluding Iraq, net revenue grew 1% and underlying volumes fell 4%, which was slightly better than market volume declines (-4.5%). With full year expectations unchanged, the shares were modestly higher in early morning trading.

Key highlights:

  • Growth Brands grew underlying net revenue and volumes by 14% and 10%, respectively and gained market share. Specialist Brands net revenue was up 3%.
  • In Growth Markets, underlying net revenue was down 1%; up 3% excluding Iraq. Underlying net revenue grew by 1% in Returns Markets.
  • Cost optimisation programme remains on track to deliver £85 million savings in FY15
  • The acquisition of US cigarette and e-cigarette brands from Reynolds and Lorillard completed on 12 June 2015 for a consideration of $7.1bn (£4.6bn).
  • On track to deliver dividend growth of 10% for the full year

Our view

The acquisition of US assets from Reynolds and Lorillard changes the geographic profile of Imperial Tobacco. Imperial's share of the US tobacco market rises from 3% to 10%, and the proportion of net revenues generated from the US rises from 7% to almost a quarter of the group total.

The deal is attractive for Imperial on a number of fronts. Cigarette volumes have been falling by around 3-4% a year in the US, but it is still the world's second largest tobacco market by volume. The regulatory environment for tobacco is also more stable than in many other nations - the last federal excise tax increase was in 2009. Currently cigarette prices in the US are amongst the most affordable in the world. In the UK a person on average wages would have to work for an hour to be able to afford 20 cigarettes. In the US, that figure drops to just 21 minutes. Because prices start from a much lower base, the group has much more scope to raise prices to offset falling tobacco volumes.

The US deal, combined with the group's on-going cost and efficiency drive, should help to support cash flows and the dividend. The shares currently yield around 4.3% (variable and not guaranteed), but, on the current dividend policy the yield could rise to 5.3% by 2017. Following a strong run over the last year the shares now trade on a price to earnings ratio (P/E) of around 14.2x, which is above its long run average but a modest discount to the market as a whole.

Alison Cooper, Chief Executive, commented:

"This has been another good quarter, building on the progress we made in the first half. Our continued focus on improving the consistency and quality of our performance has delivered excellent results from our Growth Brands which continue to grow net revenue, volume and market share. We've strengthened our performance in Returns Markets and maintained positive momentum in Growth Markets.

We completed the US acquisition towards the end of the quarter and I am pleased with the successful start we've made in implementing our commercial and integration plans for ITG Brands. This consistent delivery against our strategic agenda leaves us on track to deliver against full year expectations and to create further sustainable value for our shareholders."

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.