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. 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 been reluctant to view it as a growth industry. The Woodford funds have maintained a large exposure to tobacco businesses for many years, believing them to be structurally undervalued – at times profoundly so. More recently, however, the wider sector has enjoyed a material re-rating to valuation territory which more appropriately reflects its attractive attributes. Other tobacco stocks have subsequently been sold from the portfolios but Imperial Brands remains, representing the last bastion of outstanding value in the sector.

Recent 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 8.43%
Equity Income Fund 8.71%

As at 31 August 2018

Segmentation
Geography United Kingdom
Industry Consumer Goods
Themes Special situations

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

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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