Is Imperial Going to Continue to Smoke?

Source from:  News Markets 04/29/2016

Imperial Brands, the UK tobacco giant recently known as Imperial Tobacco, reports half-year earnings on May 4.

Imperial switched its last name from 'Tobacco' from 'Brands' to reflect the way that it wants to be seen by regulators, investors and the general public - a move that was approved at the company's AGM in February.

One of the major drivers behind the move is the growing popularity of e-cigarettes. The 'vaping' world is less regulated but considered far less dangerous that smoking itself.

Last year, Imperial bought e-cigarette brand blu, part of ITG Brands, which makes Winston, Maverick, Kool and Salem cigarettes - from its US rival Reynolds for $7.1 billion (£4.2 billion) after the latter announced that it was going to merge with fellow cigarette maker Lorillard.

The purchase gave Imperial a 26% exposure to the US market, which it will need to help boost its bottom line after the latest anti-tobacco move by the UK government, which made it law that cigarettes can only be sold in plain packaging come May. Packaging across all brands of cigarettes will be all the same - removing any need for marketing.

But one of the most interesting things is price: at the moment, cigarettes are expensive in the UK but cheap in the US.

"Cigarette prices in the US are amongst the most affordable in the world. Because prices start from a much lower base, the group should have much more scope to raise prices to offset falling tobacco volumes," writes Charlie Huggins, an analyst at Hargreaves Lansdown, the UK's biggest broker.

It will be interesting for investors to hear what chief executive Alison Cooper says about the regulatory issues as well as the emergence of the 'vaping' brands - as well as how the group is dealing with a reduction in serious decline in volumes, mostly thanks to conflicts in the Middle East that have led to the group closing down its operations in Syria and Iraq.

Despite the smoke in its face, the group's share price has been up a quiet 1.4% year-to-date, but has risen massively in the last month, jumping 17% after it reported first quarter results that were not as bad as feared.

And analysts believe Imperial's half-year results will be pretty healthy, too.

According to consensus forecasts Imperial will report a first half earnings (EPS) rise to 111 pence per share from 93.3 pence in the first half of last year. Tobacco net revenue is forecast to rise to £3.4 billion from £2.9 billion this time last year.

Analysts at Goldman Sachs think the numbers will be even better, thanks to the inclusion of the US brands in its portfolio among other things.

Like most tobacco companies, Imperial is generous to investors. In the first half of 2015 the group hiked its interim dividend by 10% to 42.8 pence from 38.8 pence, and Huggins anticipates the same sort of increase every year until 2019. Enditem