Imperial Brands

Description

Imperial Brands is a consumer goods company which manufactures, markets and distributes nicotine products including well-established brands such as Davidoff, West and Winston. It also has a portfolio of next generation products (NGP), such as its e-cigarette myBlu, which is delivering rapid growth.

Since its demerger from Hanson in 1996, Imperial Brands has been a great ‘compounder’, delivering impressive double digit annualised total returns to shareholders, through a combination of an attractive dividend income stream and strong, dependable dividend growth. That growth has been driven organically, augmented by cost rationalisation and a series of value-enhancing strategic acquisitions, which have transformed the company’s regional profile.

With a high market share in the UK, Imperial Brands is still seen by many as a local player in a globalised industry. In reality, the majority of its revenues these days are derived from overseas but, in an industry which is arguably approaching the final stages of consolidation, Imperial Brands is one of very few potential bid targets.

Investment case summary

The tobacco industry offers many attractive investment characteristics such as sustainably high profit margins, substantial barriers to entry, strong cash generation and considerable pricing power. However, the market has historically been reluctant to view it as a growth industry. The Woodford funds have maintained a large exposure to tobacco businesses through this period, believing them to be structurally undervalued – at times profoundly so. The valuation gap has narrowed in recent years for much of the industry, but Imperial Brands remains one of the last few bastions of outstanding value in the sector.

Current market conditions have not been favourable for Imperial Brands, which has been a deeply unpopular stock. Nevertheless, from a fundamental perspective, Imperial Brands continues to be a business which should deliver attractive and sustainable long-term dividend growth, as it has done throughout its history as a quoted, independent business. With the share price revisiting valuation territory that we haven’t seen in many years, Imperial Brands simply looks like it is trading at the wrong price.

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Fund exposure
Income Focus Fund 8.97%
Equity Income Fund 8.36%

As at 31 October 2018

Segmentation
Geography United Kingdom
Industry Consumer Goods
Themes Special situations

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Strong full year results

Strong full year results from Imperial Brands this morning. Financial milestones for 2018 have been achieved, albeit at the low end of the range. 10% dividend growth delivered at a 69% payout ratio. The business was characterised by growing combustible momentum in the second half (revenue performance in the first half of the year was -2.1% but this has swung to +6.0% in the second half), resulting from an improving tobacco industry environment. This momentum, and an increasing contribution from the NGP portfolio, has led the company to guide to ‘at, or above, the upper end’ of its 1-4% guided range for the financial year just commenced. The 4-8% EPS target and dividend growth targets are maintained. Overall, a positive set of results with organic momentum building behind this business.

Alex Correia
6 November 2018

Trading statement and capital markets day

Imperial Brands released today an encouraging trading update, which demonstrated that the company is performing in line with management’s guidance. The business remains on track to deliver revenues growth between 1-4% and earnings growth in the range of 4-8% for the full year. These targets are despite fluctuations in foreign exchange rates which continue to be seen by management as a headwind to earnings. Also, the company’s prices and the mix of higher price products both increased, driving revenue performance. This, coupled with the fact that Imperial Brands is ahead with its cost savings schedule, already being above the £100m target, gives management confidence in its growth targets.

The really positive news was about Imperial Brands’ next generation product (NGP) portfolio which growing quickly. In particular, its e-cigarette (myBlu) is set to generate about £300m of sales this year, compared to £100m in 2017. Also, the company will launch Pulze, a new heated tobacco product, in early 2019. This positive momentum means that its NGP sales should contribute meaningfully to next year’s revenue performance. Furthermore, Imperial Brands is targeting compound revenue growth for its NGP portfolio of 35 – 150% in the 3 years to 2020 – arguably, this is a wide range but at its upper end is equal to roughly £1.5bn of sales.

The company’s strategy and vision for its next generation products has been articulated in more detail at its capital markets day, which we attended. The vapour market presents large commercial opportunities – with potentially 110m – 160m users and £30bn – £50bn of revenue for the category by 2025. This is the significant opportunity that Blu can tap into. However, there is still a significant amount of execution risk which we will monitor closely. Finally, the company showcased its robust approach to product innovation – new products include Nixx (tobacco infused vapour with a more authentic flavour) and Pulze, which we mentioned above. Overall, we are pleased with both the trading update and the additional detail the company has offered on its strategy for the NGP portfolio.

Alex Correia
25 September 2018

Interim results

A good set of results from Imperial Brands this morning. The numbers are in line with previous guidance which is a positive given the recent share price performance which suggests the market was expecting a downgrade. The strategic focus is solid and sensible, with an intention to raise £2bn through non-core disposals in order to reduce debt, simplify the business and allocate capital more effectively. This, coupled with the good progress it is making with its next generation product portfolio, should help to counter two of the key bear arguments on the stock recently. Overall, therefore, the results demonstrate that management is cognisant of the need to deliver a clear and positive message to the market and confident in its future growth prospects.

Stephen Lamacraft
9 May 2018

In good shape

This morning’s trading update from Imperial Brands confirms that the business is on track to meet expectations for the full year. The company’s growth brands continue to gain market share, resulting in a robust volume performance. Imperial Brands also announced it is stepping up its activity in next generation products (NGPs), with multiple launches lined up in the next few months.

Cash generation remains strong, and the company has reiterated its commitment to 10% dividend growth. Overall, the update is as expected and it suggests that the business is in far better shape than its share price and valuation would suggest.

Stephen Lamacraft
7 February 2018

Neil's View

All of them (tobacco businesses) share some of the same characteristics – the demand for the product is very predictable their business is capital unintensive and generates lots of cash .​⁠.⁠​.the cash returns are very attractive the dividends are reliable and there is one more upside that comes from consolidation.14 July 2014

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2018 Woodford Investment Management Ltd.
All rights reserved.

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