Pressures are building for Imperial Brands, says Jefferies

Jefferies has lifted its target price for Imperial Brands following a strong set of first-half results from the cigarette, tobacco and vape group last week, but has maintained a 'hold' rating, saying that pressures are building for the company.

The broker hiked the target price for the shares from 1,710p to 1,850p.

"IMB's 1H24 was very robust. We continue to feel it is over-earning, however, which could mean difficulties at some point," Jefferies said, highlighting two key areas of risk in combustibles and reduced risk products (RRP).

In combustibles, the broker said the industry volume backdrop in Imperial's core markets "continues to get worse and we don't see things improving", with first-half volumes in Australia, the UK and US down 25.3%, 15.2% and 8.7% respectively.

Meanwhile, headline RRP as a percentage of group sales remains "muted", sitting at just 3.9% in the first half, with absolute sales in the EU down on last year.

"The key metric to assess, for us, is its fair share of RRP relative to cigarettes. This is a minimum requirement, in our view. IMB are way away from this hurdle rate on our estimates, with estimated US and EU combustible share in FY23 at 15.0% vs RRP stick equivalent share at 1.4%," Jefferies said. Improving this, the broker said, will require a material uplift in spend.

"That said, right now the market is focused on cash returns which remain compelling. Stay 'hold'," Jefferies said.

Shares were down 0.4% at 1,957p by 1047 BST.