Imperial Brands 'on track' to meet full year expectations

FTSE 100 tobacco maker Imperial Brands said it was completing its financial year on track with expectations, helped by growth from its huge US acquisition.

The company, which said it felt it remained in a “strong” position to generate returns for shareholders, said currency translation should benefit full year earnings by 4-5% and the full year impact of currency transaction on earnings remained at around 3%, as previously indicated.

The full year trend for tobacco volumes and operating profit margin is broadly in line with the first half of the year and the company’s programme to reduce costs is on track.

Last year, Imperial Brands bought several tobacco brands from Reynolds American, including Winston, Maverick, Kool, Salem and e-cigarette blu, for $7.1bn, which was the large driving force behind net revenue growth.

The company grew its market share in the US primarily through two of these new core brands, Winston and Kool, and also benefited from revenue growth from its subsidiary Fontem Ventures, which was set up in 2013 to develop non-tobacco enterprises.

In returns markets, the company said the benefit from price increases was offset by investments made to adhere to the EU tobacco products directive (EUTPD) for plain packaging and the closure of distribution of its rival Philip Morris International in the UK and Morocco.

Nicholas Hyett, equity analyst at Hargreaves Lansdown said the company’s strategy of focusing on margins and cash flow, instead of chasing volume growth, is paying off as brand migrations and cost savings are on track.

The company has a large number of local and regional brands which have limited consumer appeal and the company is in the process of migrating consumers to a select number of higher quality growth brands, which would reduce cost.

Hyett said the integration of the US businesses is delivering against expectations and the deal with Reynolds American raised US revenues from 7% to almost a quarter of its total, while cigarette prices in the US are among the most affordable in the world because prices start from a lower base, the company should have more scope to raise prices to offset falling tobacco volumes.

He added: “The industry is subject to numerous risks, with governments increasingly keen to crack down on tobacco consumption. The introduction of plain packaging in the UK and Ireland in mid-2016 (and its possible adoption in other EU markets in the longer term) is a potential threat, and taxes will only go one way. In theory, this will make it harder to keep pushing up prices.

“But if Imperial can keep up its cost and efficiency drive and successfully integrate the US assets, it ought to be able to grow profits, pay off debt, and return further cash to shareholders.”