Tobacco net revenue is set for low-single-digit growth, while double-digit growth from Next Generation Products implies a material second half acceleration, helped by acquisitions during the period.
A £1.5bn buyback has been announced for the current financial year, in-line with last year’s payout. Net debt to EBITDA (cash profit) is expected to remain at the lower end of the 2-2.5x target range.
The shares rose 2.1% in early trading.
Our view
Earlier macro concerns haven’t knocked Imperial Brands off course, with the year-end trading update confirming guidance remains intact. While economic uncertainty remains high, its focus on the value end of the tobacco market could leave it less exposed than peers to a dip in consumer sentiment.
Robust tobacco pricing, balance sheet discipline and growing momentum in Next Generation Products (NGP) have provided some reassurance after a period of weaker sentiment. But with little in the update to raise expectations or signal a faster pace of cash distributions, rebuilding further momentum will require consistent delivery.
The addictive nature of its products and investment in its brands have allowed Imperial to keep raising prices, and the pricing outlook remains robust in many key markets. However, with volumes under pressure, the sustainability of further price hikes is something to watch.
Tobacco companies need to move with the times. Regulatory pressure and consumer preferences for healthier lifestyles will bring further challenges.
That's why the entire industry's jostling for position in the up-and-coming Next Generation Products (NGPs) market, including products like heated tobacco and vapes. It's not been an easy start for Imperial, and while a more focused approach to the NGP portfolio is starting to bear fruit, particularly outside of the US, these products are still a relatively small part of the picture and are yet to turn a profit.
The strength of the wider business provides scope to invest in product development and marketing, while acquisitions are also being used to build scale more quickly. It's too early to say if they can be a viable replacement for the shrinking tobacco business. We’ll need to see several years of high double-digit growth and demonstrable evidence of sustainable profit margins. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.
Cash generation has consistently impressed. That’s supporting a generous 7.0% forward dividend yield and investment in new products, all while keeping net debt towards the bottom of Imperial’s target range. While no shareholder payouts can be guaranteed, buybacks also remain part of the picture.
Imperial’s slow start in NGPs is reflected in a valuation that remains considerably less demanding than the peer group. Forecasts suggest analysts are not pricing in a step-change in contribution any time soon, but delivery against current expectations could still offer some upside. Key risks include a deterioration in the wider tobacco market and higher NGP investment weighing on profits.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
Imperial Brands’ overall management of ESG issues is strong according to data by Sustainalytics, but we have some concerns. The company has stressed its commitment to offer smokers a choice of potentially less harmful products. However, in 2023 next-gen products made up just over 3% of net revenue. The company is also involved in controversies related to business ethics (including child labour and employee exploitation in the supply chain), marketing practices, and the social impact of its products.
Imperial Brands key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.