Imperial Brands sees 6% earnings fall on higher Covid provisions
By Frank Prenesti
Date: Thursday 08 Oct 2020
(Sharecast News) - Tobacco company Imperial Brands said it expected full-year earnings to be 6% lower as it made higher provisions for stock and bad debts, citing ongoing Covid-19 uncertainties.
The company, which makes Peter Stuyvesant and John Player cigarettes, said revenue would be flat on a constant currency basis as better-than-expected tobacco sales offset a slump in new generation products and lower duty-free sales due to the collapse in international travel caused by the coronavirus pandemic.
It noted "some Covid-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco".
"This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US. These positive trends have helped to offset relatively weaker market volumes in the duty free channel and in some traditional summer tourist destinations, where reduced travel has impacted demand."
It added that revenue in new generation products such as vapes would fall by a third after "disappointing" trading "albeit in line with our revised expectations with the level of underlying losses reduced in the second half as we curtailed expenditure".
Hargreaves Lansdown analyst William Ryder said: "The news around Next Generation Products is disappointing, but unfortunately not too surprising. Imperial has pulled back on investment and sales have taken a hit."
"We think there will still be a future in Next Generation Products and doubt they were just a fad, but the industry has had to scale back its expectations from a few years ago. It doesn't look like vaping will be driving massive growth any time soon."
Neil Wilson at markets.com said the rise in cigarette smoking was "another unwanted side effect of governments' inept, disruptive and failing approach to dealing with the coronavirus".
"It's been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, (Health Secretary) Matt Hancock recently admitted that cancer patients would only be treated if the virus was 'under control'."
At AJ Bell, investment manager Russ Mould said Imperial's forward price/earnings ratio "of barely 5.5 times, coupled with that chunky yield, may look like stand-out 'deep value' to some investors".
"But to others Imperial will just look like a value trap. The combination of low earnings multiple and high yield certainly suggests that investors remain very sceptical of the tobacco giant's ability to maintain its profitability and cash flow, and thus dividend-paying potential, over the long term, thanks to regulatory pushback on smoking and increased public health awareness. In addition, tobacco stocks will fail to pass any ethical screens which investors care to run."
Mould said investors were unlikely to be persuaded that the second half's improved trading, "presumably the result of people being stuck at home during lockdowns and worrying about their jobs or the pandemic" would last.
"It will take more than one trading statement that does not feature any nasty surprises to convince a sceptical market, especially dividend yields that looked to be around 10% (or higher) on paper eventually proved to be nothing of the sort in reality once pay-outs were cut at firms like Vodafone, Shell, BP, Royal Mail and Centrica," he added.
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