Imperial Brands boosted by net organic revenue growth

The market responded positively to interim figures from Imperial Brands (IMB), which detailed how a rise in tobacco prices partially offset an overall fall in volumes. Those opposing levers form part of what is by now a familiar narrative where the tobacco market is concerned. However, analysts at Barclays sense that investors may no longer view the group as simply a “cash return machine with significant uncertainty around terminal value”, but rather a business that might “outgrow British American Tobacco (BATS) and Altria (US:MO) sustainably due to focused execution in its combustible business”.

The Barclays conjecture is not beyond the bounds of possibility, but Imperial’s forward dividend yield is effectively compensation for the secular decline in cigarette volumes and it’s hard to imagine that shareholder returns aren’t at the heart of the investment case. The interim dividend has been increased by 4 per cent to 44.9p a share, while share buybacks amounting to £604mn were completed during the period. Worryingly, however, the free cash outflow increased from £432mn to £523mn, although management said the group remains on track to deliver material inflows by the year-end.

The group recorded its strongest net organic revenue growth in more than 10 years. Net revenue from next-generation products (NGP) grew 16.8 per cent to £125mn, a highly favourable outcome given consumption trends. On a constant currency basis, adjusted profits rose by 2.8 per cent, aided by a related cash conversion rate of 97 per cent, reflecting improvements on the working capital front. Some high-profile companies have struggled recently in the broader fast-moving consumer goods space, so from a trading perspective, Imperial’s net revenue performance in the first half, coupled with improved prospects for full-year upgrades, would have pleased industry analysts.

The group increased market share in three out of its five geographic locales, while launching new products across all its categories, including entry into the US oral nicotine market with the new ‘zone’ brand.

Looking ahead, Imperial expects to deliver low single-digit, constant currency tobacco and NGP net revenue growth this year, helped along by the pricing measures already put in place. Financial performance should benefit from a lower cash tax charge in the remainder of the year, and management believes net debt will fall to two times cash profits (Ebitda) by the end of the year, against the half-year multiple of 2.5 times. The current consensus enterprise/Ebitda multiple of 6.4 times is below the five-year average and that of peers. However, we think that any improvements in market share are outweighed by the spectre of regulatory risk. Hold.

Last IC view: Hold, 1,776p, 14 Nov 2023