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Imperial Brands - trading in line with guidance

Imperial Brands is on track to deliver full-year net revenue growth of 0-1%, adjusting for currency fluctuations. Meanwhile, underlying operating profit is

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Imperial Brands is on track to deliver full-year net revenue growth of 0-1%, adjusting for currency fluctuations. Meanwhile, underlying operating profit is expected to grow around 1%.

Overall market share grew in the five core markets. Gains in the US, UK and Australia offset losses in Germany and Spain. The group was able to maintain "strong pricing discipline" over the period, with tobacco volumes trending in line with expectations.

Next Generation Product (NGP) trials continue, with consumers reacting positively to the Pulze heated tobacco system in Greece and the Czech Republic, and blu vapour products in the US. First-half NGP revenue is expected to be slightly ahead of the previous period.

We're expecting to hear more details in the half-year results announced on 17 May 2022.

The shares were up 1.9% in early trading.

View the latest Imperial Brands share price and how to deal

Our view

The decision to suspend Russian and Ukrainian operations will garner a lot of attention. But operationally speaking, these regions are a very small piece of the Imperial Brands pie and the broader investment picture hasn't changed much.

As we enter the second year of Imperial Brands' 5-year strategy, focus remains on improving market share in core markets - the US, UK, Spain, Germany and Australia - which account for around 70% of profits. Trends seen last year seem to be continuing. Growth in the US, UK and Spain is progressing, but Germany and Australia remain tough cookies to crack.

Helped by the sale of the Premium Cigar business last year, net debt has dropped in line with the group's target of 2-2.5 times earnings. And that's given management the confidence to start the slow process of re-growing the dividend.

That makes profit growth the main area of focus. Price increases last year were able to prop up sales despite declining volumes but that's a short-term solution. Next Generation Products (NGPs), like heated tobacco and vaping products, offer a route for growth, but it's not been an easy start. Management responded to its NGPs' lukewarm reception by exiting unprofitable markets, homing in on those it felt had more potential. We're yet to hear many specifics, but early commentary sounds positive from trials in heated tobacco products and the blu brand in the US.

Investment in these new products will weigh on performance in the short term, and the NGP division is loss making, albeit losses are expected to reign in a touch. It's the right move if a narrowed focus helps the group build out successful cigarette-alternatives, but there's a long way to go before these products start to make a meaningful positive impact on performance.

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 really warrants, but it's hard to see attitudes changing and valuations recovering. Any investment case should therefore be built around the dividend yield, which is substantial, and the NGP prospects.

In the medium-term, Imperial can probably continue to squeeze more money out of fewer smokers. But further into the future, it's NGPs that will be driving this train. As it stands, that doesn't fill us with a lot of confidence. A prospective dividend yield of 9% makes the uncertainty more palatable, but there's no guarantee it will remain so lofty.

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.

Trading Update (adjusted for currency fluctuations)

First-half group revenue is expected to come in broadly flat. Weaker tobacco performance in Europe, driven by the return of pre-covid purchasing patterns as international travel picked up, was offset by growth in other regions. The group expects European revenue to benefit from increased prices in the second half of the year.

Reduced losses from the NGP division mean underlying operating profits are expected to grow by around 2% at the half-year mark. Tobacco performance, as expected, should be weighted toward the second half. First-half tobacco operating profit will be broadly flat on last year, as higher investment offsets reduced US litigation costs.

The group expects underlying net debt to cash profits (EBITDA) to improve from 2.6x to 2.4x at the half-year, with further improvement coming at the full-year.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 6th April 2022