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Imperial Brands - full year guidance in-tact as volumes fall

Imperial Brands saw a 1% decrease in underlying half year revenues to £3.7bn.

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Imperial Brands saw a 1% decrease in underlying half year revenues to £3.7bn. The group had "robust" pricing, but growth was held back by the exit from Russia and a 6.8% decline in volumes across the rest of Imperial's markets.

As a result, underlying operating profit for the first half was broadly flat, up just 0.8% to £1.7bn, ignoring the effect of exchange rates. This was in-line with previous guidance.

Free cash outflows of £432m compared to an inflow of £336m last year. But the company remains "on-track to deliver material inflows at the full year". Net debt was up from £9.8bn to £10.2bn.

The first half saw £500m of share buy backs, with similar levels expected in the second half. An interim dividend of 43.18p was declared.

Imperial is expecting an improvement in profitability in the second half, as price increases taken in the first half take full effect.

The shares were trading flat following the announcement.

View the latest Imperial Brands share price and how to deal

Our view

Imperial Brands is flexing its pricing power further this year, which it believes will help it eke out modest revenue and profit growth. But with profits flat in the first half, even modest full-year growth expectations mean there's a lot to deliver in the second half.

Imperial's narrowed focus on core markets has made some inroads into market share of late. But weakness in the UK and Germany is something to watch.

Profit growth has been hard to come by. Price increases in traditional tobacco products have propped up sales despite declining volumes. For now, that's enough to give management confidence they can grow underlying operating profit in the mid-single single range over the next few years.

However, the cigarette market's growth is unlikely to get much more exciting. Imperial isn't alone in that. The entire industry's jostling for position in the up-and-coming Next Generation Products (NGPs) market, including products like heated tobacco and vape.

It's not been an easy start for Imperial. Management responded to its NGPs' lukewarm reception by exiting unprofitable markets, homing in on those it felt had more potential. It's early doors, but the initial reaction to recent product launches has been promising.

Investment in these new products weighs on profits, and the division is loss-making. There's a long way to go before these products impact performance positively. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.

Net debt is sitting towards the upper end of the group's target of 2-2.5 times earnings but is expected to be closer 2.0 times by the year end. This means that the remaining £500m of the 2023 buyback programme should be achievable. That's in addition to the prospective yield of 8.1%. Analysts forecast that dividend payments are currently 2.5 times covered by free cash flow, but no returns are guaranteed.

As the smallest of the four tobacco giants, rumours often swirl that Imperial will get bought out by one of the bigger players. This isn't imminent though - and we think competition regulators would prove a major hurdle given the already high degree of market concentration.

The other important thing to consider with tobacco stocks is that many institutional investors can't, or won't, invest in the sector. This may mean that the shares are rated lower than the outlook for the industry warrants, but it's hard to see attitudes changing and valuations recovering. An investment case should therefore be generally built around the dividend yield, which is currently substantial, and the NGP prospects.

It's promising to see some tangible results from the revitalised business plan, and investors are being rewarded for sticking with it. But Imperial still has plenty of work to catch up with rivals with much more evolved next-generation product ranges. That's reflected in a valuation sitting towards the bottom of the peer group.

Imperial Brands key facts

All ratios are sourced from Refinitiv. 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 Refinitiv. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 16th May 2023