Imperial Brands confident despite slow burn in first half

The FTSE 100 giant, which rolled out a 10% increase in its interim dividend of 56.87p, saw its total tobacco sales volumes fall 2.1% in the six months to 31 March, outperforming an industry-wide fall of 5.7%, while its growth brands, such as Gauloises, Lambert & Butler and Winston, grew volumes 6.3%.

Due to the industry's competitive price backdrop that continued from the last financial year into the beginning of this one, tobacco net revenue declined 5% to £3.5bn, or 2% at constant currency.

With investment increasing this year to £150m in new-generation products (NGP) in the vaping and ecigarettes space, such as the new 'myblu' reusable pod system, and as this has been weighted to the first half of the year, with cost savings weighted to the second, adjusted tobacco operating profit fell 8% to £1.5bn.

With logistics profit up 21% to £99m, group adjusted operating profit was down 6.7% to £1.62bn but slightly higher than the £1.60bn expected by analysts. Adjusted earnings per share shrank 6.2% to 114.3p, not helped by a foreign exchange headwind of 5.2%, but beating the consensus forecast of 111.9p.

Including the one off impact of from the administration of UK distributor Palmer & Harvey, operating profits were down 7.6% to £833m and EPS was down 27% to 51.7p.

Directors said Imperial was still on track to deliver on full year expectations and anticipated that the expansion of blu franchise underpins second-half revenue growth. The initial roll-out of myblu has received a "strong positive consumer response" in markets where it has been launched so far, being the USA, UK, France, Germany and Russia, with plans to add five further markets in the second half and launch different e-liquid flavours in the coming months too.

An "open system product", blu ACE, described as "the most powerful device in our portfolio" is also being launched this year, while a heated tobacco product has also been developed and put through successful consumer trials in Japan and Europe in the first quarter of the financial year and are currently being refined ahead of more comprehensive trials in the coming months.

Chief executive Alison Cooper said the first half had seen good progress in both tobacco and NGPs: "Investment in our key tobacco brand equities has strengthened our position in our priority markets, with further share gains driven by growth brands.

"Within a tough but improving environment, we exited the first half with much stronger price/mix and expect to convert our improved share into top-line growth in the second half."

She said the sharper focus on these core brands and products would provide opportunities for divestments, with an initial plan to generate £2bn proceeds within the next 12-24 months.

"This will further simplify the business, enhance performance and release capital to pay down debt, deliver returns to our shareholders and, where appropriate, invest in our growth agenda."

Imperial shares jumped 4% to 2,722p in the first hour and a half of trading on Wednesday, their highest since early February.

Analysts at RBC Capital Markets say their "worst fears have not arisen", with volume and revenue declines within expected ranges, while operating profit and EPS were 1% and 2% respectively ahead of company-compiled consensus.

While volume and revenue declined, it was felt to be a solid performance: "Things seems to be going to plan for the first time in a while at Imperial...EBIT 1% ahead of consensus expectations – with no funnies that we’ve found so far – is also welcome."

RBC noted management are "doing the right things to fix its top line".