- Price increases compensate for volume decreases
- Further progress in debt reduction
With “Big Oil” billed as the new pantomime villain, the recent COP 26 summit had to provide some room to breathe Imperial marks (IMB) and its peers. It may be fanciful to suggest that tobacco companies were once considered just as important as hydrocarbon producers, at least by a significant proportion of the population, but those days are long gone, as both sectors are forced to ” evolve in response to regulatory requirements.
By now, the anatomy of the tobacco group’s annual figures is well known: secular decline of its traditional products, strong cash generation, high yield dividends and heavy leverage. These factors are still present, but Imperial is looking to deleverage its balance sheet, while prioritizing its more lucrative end markets.
Concretely, the group increased tobacco prices by 4.4 percent to help offset a 2.9 percent drop in overall volumes. You would imagine that the demand for nicotine products would be quite inelastic, but there must be a time when consumers are in doubt. Perhaps next generation (PNG) products such as electronic cigarettes and tobacco heaters will gradually attract more discretionary income streams if the price of traditional tobacco is effectively taken off the market.
An overall decline in market share in the five priority markets has been largely halted, as evidenced by a relatively modest 2 basis point contraction, with share gains in the US, UK and Spain partially offset by decreases in Germany and Australia. But the group’s exit from certain other markets contributed to a 3.9% drop in revenues from new generation products. Somewhat unexpectedly, therefore, the 1.4 percent increase in organic net revenues was attributable to Imperial’s traditional product groups.
Net debt fell from £ 1.77 billion year-on-year to £ 9.37 billion, or 2.2 times cash profit, thanks to the proceeds from the sale of the Premium Cigar division and the lawsuit efficient cash conversion. Free cash flow of £ 1.52bn was half that of the previous year, but this was mainly due to an outflow of working capital driven by changes in rights payment dates.
Health issues predominate. Imperial admits it cannot accurately predict the impact on product volumes if widespread Covid-19 restrictions are reintroduced. More bizarrely, reports have emerged that NGP may eventually become available as part of the NHS – with proscriptions giving way to prescriptions.
Management focuses on areas of the business that it can directly influence, with market optimization and debt reduction at the forefront. But until we see further progress on both fronts, the group’s ability to raise pay rates remains questionable. To sell.
|IMPERIAL MARKS (IMB)|
|ORDER PRICE:||1605p||MARKET VALUE:||£ 15.2 billion|
|TO TOUCH:||1,604 to 1,607p||UP TO 12 MONTHS:||1686p||LOW: 1330 p|
|DIVIDEND RETURN:||8.7%||P / E RATIO:||5|
|NET ASSET VALUE:||566p *||NET DEBT:||148%|
|Year to Sept. 30||Turnover (£ bn)||Profit before tax (£ bn)||Earnings per share (p)||Dividend per share (p)|
|* Includes £ 16.7 billion of intangible assets, or a share of 1,762 pa|