Shareholders at Imperial Brands could feel "very uncomfortable" in the coming months, after the tobacco firm forecast a 10% reduction in first half earnings per share, a leading industry analyst has warned.
Russ Mould of AJ Bell was commenting following an AGM trading update by Imperial Brands, in which the business said that while group net revenue is likely to remain in line with expectations, the ban on flavoured vaping products will impact the business' first half adjusted operating profit to the tune of £45 million, due to inventory writedowns.
Changing Tactics
“In the unlikely event that they didn’t know why Alison Cooper had scrapped her target to grow Imperial Brands’ target for 10% dividend growth a year and then stepped down from the CEO post shortly afterwards, shareholders do now after today's messy trading update,” Mould said.
“The forecast of a small drop in (adjusted) earnings per share for the year means the analysts’ consensus of a 3% decline is in with a chance of being right. But the company’s forecast of a 10% slide in the first half puts ever greater emphasis on the second six months of Imperial’s financial year to September and increases the risk of earnings disappointment."
Despite the group's vaping issues, its core tobacco business made a 'good start' to the financial year, with Europe benefiting from price/mix gains, the US remaining 'strong' and its Africa, Asia and Australasia division delivering revenue growth, the company said.
"The core tobacco business is performing as expected, especially in Europe, where price increases are largely compensating for declines in stick (cigarette) volumes, and also Australasia," Mould noted.
"Even the US performance seems to be solid on an underlying basis and shareholders will be hoping that the £45 million vaping inventory write-down Stateside is just a one-off, especially as this is no bigger than the company had been forecasting in the autumn."
Shareholder Concern
Therefore, Mould added, shareholders that have 'stuck' with Imperial Brands "therefore still face the question of whether the plump 11% yield and lowly forward price/earnings multiple of around 7 times both price in a lot of the bad news or not – and therefore whether the stock is a value trap (or not).
“Dangers still abound. Strong fund flows into stocks that pass environmental, social and governance (ESG) screens and away from names that are seen to be less ethical could mean Imperial Brands’ shares keep falling; regulatory pressure remains intense; and price increases may not be enough to compensate if stick volumes fall at a high-single-digit percentage rate."
Cigar Disposal
Elsewhere, Nico von Stackelberg of Liberum Capital noted that Imperial Brands' planned disposal of its premium cigar business is an "encouraging" sign, and one that could lead to value creation.
"It is encouraging that the company included a line saying that it continues to consider potential divestments of other non-core operations," he said in a briefing note.
"The ex-CEO made reference to drawing a line under the disposal programme once the premium cigar asset goes. We are very encouraged by this comment as we believe Imperial has an opportunity to realise value through disposing of non-core geographies to motivated buyers."
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine
