Imperial Brands Group (IMB) Ordinary 10p

No recommendation - 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 grew first-half underlying revenue by 3.2% to £3.7bn, before currency movements. Growth was supported by strong tobacco pricing which more than offset a 3.2% volume decline. Sales of Next Generation Products (NGP) were up 15.4%.

Underlying operating profit grew by 1.8% to £1.7bn, held back by a flat performance in the distribution arm as well as increased investment in tobacco and NGP.

Underlying free cash outflows were broadly flat at £0.5bn. Net debt fell slightly to £10.5bn.

Full-year guidance is unchanged with underlying sales growth expected in the low-single digits and operating profit growth in the mid-single digits.

Imperial is rephasing dividends to be paid in four equal instalments. On an underlying basis, the interim dividend increased by 4.5% to 80.16 per share. £620mn of shares were repurchased in the period.

Stefan Bomhard intends to retire as CEO and will be succeeded by Chief Financial Officer Lukas Paravicini in October 2025.

The shares fell 6% in early trading.

Our view

Imperial Brands remains committed to achieving mid-single digit growth this year, but after a sluggish first half, the market didn’t seem too convinced. There doesn’t appear to be much exposure to changes in global tariffs. Nonetheless, there will need to be a big step up in profitability if targets are to be met as the year goes on. That’s a tricky ask for a new CEO due to start later this year, but given it’s an internal hire, there shouldn’t be too much disruption to the strategic plan.

The focus on tobacco markets, where it sees the scope to grab market share, is paying off with share gains in the first half better than hoped for. Volume pressures have also been easing in some of these markets. The nature of selling an addictive product means Imperial's been able to put through big price increases. But a need for sustained brand investment has been keeping a lid on profit growth.

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, 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 generous distributions to shareholders and investment in new products while keeping net debt below Imperial’s target range of 2.0-2.5 times underlying cash profit (EBITDA).

We think shareholder distributions are an attractive part of the investment case, but we’re not alone. Improving investor sentiment has driven up the valuation, meaning the prospective dividend yield of 5.8% isn’t quite as high as it once was. While no shareholder payouts can be guaranteed, buybacks also remain part of the picture. But here, the higher valuation means the benefits to shareholders won’t be as pronounced.

That increases pressure on the company to deliver sustainable profit growth. While we see some opportunities should it make progress in its priority markets and execute on the NGP rollout, growing the bottom line isn’t proving to be easy.

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 moderate controversies related to business ethics (including child labour and employee exploitation in the supply chain), marketing practices, and the social impact of its products.

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.

Previous updates