Imperial Brands Plc (LON: IMB): Improved market share driven by the resilient business performance of tobacco segment.

Imperial Brands Plc is a FTSE-100 listed company, which is engaged in providing consumer goods. It is a British multinational company headquartered in Bristol, England. The Company is one of the world’s leading producer of cigars, fine-cut tobacco, and tobacco papers. It has two broad business segments: Tobacco and NGP (Next Generation Products), engaged in manufacturing, sale, marketing, and distribution of Tobacco and NGP products. The Company has three broad geographic segments, Europe, America, and AAA (Asia, Africa, and Australasia). The core business encapsulates a wide variety of a comprehensive portfolio of cigarette, fine cut, and other tobacco products. On 3 February 2021, the Company will hold its Annual General Meeting. Some of the most prominent brands are shown below:

(Source: Company Website) 

Recent Trend of Dividend Payments

(Source: Annual Report, Company Website)

The Group has a progressive dividend policy of giving shareholders a more regular cash return considering the underlying business performance. The Company had paid two interim dividends totalling 41.7 pence per share during June 2020 and September 2020. The third interim dividend of 48.0 pence per share was paid on 31 December 2020.

The Company will pay a proposed final dividend of 48.01 pence per share on 31 March 2021, subject to AGM approval and having the ex-dividend date of 18 February 2021. The chart below reflects the progressive dividend policy adopted by the Company.

(Source: LSE, chart created by Kalkine Group)

Growth Prospects and Risk Assessment

The Company has been showing good trading performance covering all geographies and has a significant presence in the USA where it is engaged in trading through ITG Brands business. The Company is focussed towards making a meaningful contribution to reduce harmful effects by developing and expanding its NGP segment. The Company has anticipated NGP segment to capture 20% of total nicotine business. IMB has potentially less harmful products across all three NGP categories: Oral Nicotine, Vapour & Heated Tobacco.

However, the performance can be impacted with ongoing Covid-19 challenges which can disturb the cash collection, operational delivery, and transform the consumer behaviour. The business is also exposed to the risks pertinent to the failure of new product development, unfavourable price outcome, credit rating downgrades, interest rate fluctuations, lower inflation, and competition in the tobacco market.

Industry Outlook Dynamics

The UK Tobacco market is highly skewed and controlled by a few market players capturing a large market share. The tobacco industry is undergoing a transformational shift from traditional cigarettes to alternatives. As per the report from the Grand View Research, the global tobacco market is projected to reach USD 1.08 trillion by 2027, reflecting a CAGR of 3.1% from 2020 to 2027. The key market drivers include rising number of smokers around the world and increasing demand for the alternative tobacco products such as menthol cigars and clove cigarettes.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Imperial Brands Plc.

Recent Developments

On 27 January 2021: The Company had hosted a virtual capital event. In that event, the Company stated the transformation plan to unlock the value for the future – increased focus on the five most important markets (which represents approximately 72% of combustible operating profit); resetting the NGP strategy; reshaping the culture to support the new strategy; expects to deliver a stronger or more consistent performance; will develop the clear capital allocation framework. Moreover, in FY21, the Company’s outlook remains in line with previous expectations. The five-year transform plan also expects net revenue to grow around CAGR 1%-2% over the five years (FY20 to FY25). According to the first two years of the plan, the Company expects organic operating profit to be flat in FY22 at constant currencies as compared to FY21. Further, over the three-years (FY23 to FY25), the adjusted operating profit is expected to deliver a mid-single-digit organic CAGR.

On 4 January 2021: Imperial Brands confirmed that Alan Johnson had joined the Board as a Non-Executive Director.

A Glimpse of Business Segments

Key Performance Indicators (FY20)

(Source: Company Website)

Financial and Operational Highlights (for the year ended 30 September 2020 (FY20), as on 17 November 2020)

(Source: Company Website)

• Despite the challenging year with a poor NGP performance and some disruption from the Covid-19 pandemic, the Company delivered strong Tobacco volumes, with better market size and share trends in several markets.
• During FY20, the revenue surged 0.8%, while the Tobacco volume declined by 2.1%. The Company has bolstered its Executive Team to support its growth.
• It has also completed the sale of Premium Cigars business on 29 October 2020; proceeds would be used to reduce debt.
• On a constant currency basis, the adjusted earnings per share decreased by 5.6% year-on-year in FY20. The reported earnings per share increased by 49.4%.
• The Company has a strong underlying cash performance with a decrease in net debt and some additional benefit from the timing of excise payments.
• Return on invested capital reduced to 13.2% in FY20 as compared with the previous year, due to the impact of lower tobacco and NGP profitability.
• On 30 September 2020, the Company had committed financing in place of approximately £16.2 billion.
• Capital expenditure witnessed a reduction of approximately £80 million year-on-year, driven by a decrease in NGP-related spend and continued tight control of tobacco investments. However, the restructuring cash costs were in line with the previous year.
• It has proposed a final dividend per share of 48.01 pence, bringing the 2020 total dividend per share of 137.71 pence. The proposed final dividend will be paid on 31 March 2021.
• On 30 September 2020, the Company was rated Baa3, with a stable outlook by Moody's Investors Service Ltd. It was also rated BBB/A-2, with a stable outlook by Standard and Poor's Credit Market Services Europe Limited.
• The Company has maintained a solid cost discipline to generate substantial shareholder value.
• In FY21, the Company expects to deliver low to mid-single-digit growth in organic adjusted operating profit at constant currency.
• Further, Tobacco pricing is expected to remain strong, with constant currency IMB earnings per share expected to be slightly ahead of the previous year.
• Overall, it has shown an impressive growth in the last few years, which indicates the financial resilience and strong business model.

Financial Ratios

Share Price Performance Analysis

On 29 January 2021, at the time of writing (before the market close, at 10:30 AM GMT), Imperial Brands Plc shares were trading at GBX 1,475.50, down by 2.86% against the previous day closing price. Stock 52-week High was GBX 1,977.87 and Low was GBX 1,203.00, respectively.

From the technical standpoint, 100-day SMA (1440.6) and 14-day RSI (20.97) are supporting the upside potential.

In the past six months, Imperial Brands Plc’s stock price has delivered a positive return of ~12.71% return as compared to ~7.97% return of FTSE 100 index and a positive ~0.86% return of FTSE 350 Tobacco index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario 

The Company had anticipated delivering resilient financial performance during FY21 despite a challenging FY20. The Company had projected to reach low to mid-single-digit growth in organic adjusted operating profit without including Premium Cigar business. The Company had made strategies to reduce the operating loss of NGP business segment during H2 FY21. IMB had anticipated tobacco price to remain robust despite various operational headwinds and lower stock profits. The duty-free market would continue to face business challenges during FY21.

The operating cost would continue to remain high due to operational inefficiencies caused by Covid-19 pandemic and high regulatory costs. The higher tax rate would have a marginal impact of 2% on earnings. However, the Group expected FY21 earnings per share at constant currency would be greater than 2020 levels. The Company had expected restructuring cost of £130 million for FY21, which is less than £145 million incurred during FY20. The Company had anticipated capital expenditure and finance charges to remain same in FY21 as that of FY20.

(Source: Company Presentation)

Considering the strong tobacco volumes, resilient business model, five-year plan to transform the business, increased focus on the top five markets, solid financial performance, a strong and efficient balance sheet, strong cash conversion, sustainable business growth rate trajectory, reduction in net debt, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Imperial Brands at the current market price of GBX 1,475.50 (as on 29 January 2021, before the market close at 10:30 AM GMT) with lower double-digit upside potential based on 7.87x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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