Imperial Brand’s underlying revenue grew by 1.8% in the first half to £3.7bn. Tobacco sales were up 1.5% with price rises outpacing volume declines. Next Generation Products (NGP) revenue grew 7.5%.
Underlying operating profit was up just 0.6% to £1.6bn, held back by a lower result in Distribution and continued losses in NGP.
Free cash outflows deteriorated by £0.1bn to £0.7bn, impacted by legal settlement costs. Underlying net debt rose by £0.6bn to £10.5bn.
Full-year guidance for underlying operating profit growth of 3-5% and free cash flow of at least £2.2bn was unchanged.
The interim dividend was raised 4.0% to 83.36p per share.
The shares rose 1.1% in early trading.
Our view
Imperial Brands had little new information to share in its first half results. Given the deterioration in the macro-outlook, investors were happy enough to hear that full-year guidance remains in reach. There’s been no material impact from the Iran conflict so far, but a prolonged crisis could weigh not just on costs but also demand, with less smokers picking up crates of cigarettes as they pass through Duty Free.
The company has leveraged the addictive nature of its product and invested in its brands, allowing it to keep moving prices upwards. Imperial still has a robust outlook on pricing in many of its key markets. However, with volume declines starting to widen again, the sustainability of further price hikes is something to watch out for.
Tobacco companies need to move with the times. Regulatory pressure and changing consumer preferences towards healthier lifestyles means we think there will be further challenges ahead.
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.
It's too early to say if they can be a viable replacement for the shrinking tobacco business. First, we will 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 impressed consistently. That’s supporting a generous 6.3% 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.
Income generation alone shouldn’t be the only criteria on which to judge the suitability of an investment. First-half performance has been on the slow side, and investor sentiment has weakened. At these levels, we think there’s some reasonable upside on offer if the company can hit its guidance. However, there’s still plenty to deliver, and macroeconomic uncertainty means there’s scope for disappointment.
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.