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Imperial Brands - Half year results in line with expectations

Nicholas Hyett | 9 May 2018 | A A A
Imperial Brands - Half year results in line with expectations

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Imperial Brands Group Ordinary 10p

Sell: 1,559.00 | Buy: 1,560.00 | Change 18.00 (1.17%)
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Tobacco volumes fell 2.1% in the first half, to the equivalent of 123.6bn cigarettes. Tobacco revenue fell 2.1% at constant currency with, with total operating profits down 2.2% to £1.6bn.

The interim dividend rose 10% to 56.87p per share.

The shares were up 2.4% following the announcement, with results broadly in line with expectations.

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Our view

Any conversation about Imperial has to address two contradictory issues. On the one hand the company, and indeed the industry, is seeing a steady decline in tobacco volumes. On the other, CEO Alison Cooper continues to promise annual dividend increases of at least 10% "over the medium term".

Over the last decade Imperial has been able to pay out more, despite selling less, by steadily increasing prices and incessantly trimming operating costs. Clearly that can't continue forever.

Although we're generally supportive of the focus on margins over volumes, the decision to invest in protecting and developing its brands makes sense. Scale is the key to success in the tobacco industry, and as the smallest of the big-four tobacco giants, Imperial can ill-afford to lose ground to rivals.

Investment will be particularly important for the recently acquired US brands, including Winston and Kool. They played second fiddle under Reynolds' ownership, so turning them into powerful national players requires investment. Early signs from the flagship brands have been promising.

However, investment will slow rather than reverse volume declines. That leads to the inevitable question - how far ahead does Imperial's medium-term guidance for dividend growth stretch?

The balance sheet is carrying a considerable amount of debt, and the associated interest costs have to be paid. The ever-present regulatory threat also has the potential to throw a spanner in the works.

Those worries have seen the company fall out of favour with the market. The shares have fallen 29% in the last year, despite its impressive dividend record.

Nonetheless, the fact is Imperial generates bucket loads of cash, and can comfortably cover its dividend payments at present. The likely sale of European logistics business Logista would deliver a steady flow of cash and Imperial's customers are sticky, to say the least.

There are plenty of cost cutting opportunities too. Imperial has various local and regional brands with limited wider appeal. Migrating consumers off those to a select number of stronger Growth Brands significantly reduces cost and complexity.

In our view, Imperial's prospective yield of 7.4% means the shares look like an attractive option for income-seeking investors. But what is one of the most generous dividend policies in the market cannot continue forever.

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Trading details

Imperial increased its market share in the half despite lower tobacco volumes, as volume declines continued across the market.

A good performance from Growth Brands was more than offset by ongoing weakness in Specialist (which includes cigars and Next Generation Products (NGP) such as e-vapour) and Portfolio Brands (which was hit by continued brand migration activity). Together, Growth and Specialist Brands now account for 65.2% of tobacco revenues.

Tobacco revenue of £3.6bn was down 2.1% at constant exchange rates. The decline was driven by falling volumes, with pricing/mix unchanged. Imps expects to grow underlying revenues in the second half, supported by positive price/mix effects.

Imperial is on course to deliver £100m of cost savings in 2018, although these will be weighted towards the second half.

Investment in NGPs has increased in the half to £150m in the year, with the launch of myblu in several markets. The group has begun to invest in heated tobacco products as well as vapour, with early trials showing positive results.

Underlying net debt fell £1.2bn in the half, or £0.9bn excluding foreign exchange effects, to £12.7bn.

CEO Alison Cooper said she expects a considerably stronger second half, with further market share gains and a stronger tobacco revenue performance. Medium term guidance remains unchanged, with the dividend growing by 10%.

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The author holds shares in Imperial Brands.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 for more information.