Imperial Brands: Capitulation On Dividend And Next Gen Products

May 19, 2020 1:07 PM ETImperial Brands PLC (IMBBY), IMBBFBTAFF, BTI, MO, PM49 Comments
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Librarian Capital


  • FY20H1 results disappointed with a 9.2% EPS decline, and management finally cut the dividend and scaled back Next Gen Products plans.
  • Despite COVID-19 consumer stockpiling, Tobacco net revenues were only up 0.9%, with a price/mix that was much lower than in prior years.
  • Next Gen Products saw revenues fall 43% as they failed to gain traction, and efforts in both e-vapor and heat-not-burn are being reduced.
  • Fears about Imperial Brands' poor cigarette markets and Next Gen Products are materialising; FY20 EPS is guided to fall mid-single-digits.
  • At 1,530p, while the valuation is superficially attractive, there are deep strategic challenges that are difficult to be offset by the share price.

(We previously wrote about tobacco stocks as "Blue Sky Capital")


Imperial Brands (OTCQX:IMBBY) (referred here as "IMB") announced their FY20H1 (ending 31 March) results on Tuesday morning, and shares in London are down 7.4% as of 2 pm local time. Since we initiated our Neutral rating on IMB in July 2019 ("Imperial Brands: Worst of the Big 4 Tobacco Stocks"), the shares have lost 12.0% of their value (in pounds, after dividends), far underperforming its U.K. comparable British American Tobacco ("BAT") (BTI):

IMB Share Price vs. BAT & FTSE All-Share (Since 02-Jul-19)

Source: Yahoo Finance (19-May-20).

We believe the FY20H1 results were noteworthy in showing poor recent trading and guiding to a worse second half, and also in management finally capitulating on IMB's dividend and Next Gen Products ("NGP") plans.

Poor H1 Results & Dividend Cut

The key P&L items for IMB's FY20H1 are shown below. For the half-year, Tobacco & NGP EBIT fell 8.5% year-on-year excluding currency, and Distribution EBIT fell 4.9%, leading to adjusted EPS falling 9.2%:

IMB P&L (FY20H1)

Source: IMB results press release (FY20H1).

Poor earnings and a persistent high net debt (which actually rose year-on-year) contributed to management's decision to “rebase” the dividend by cutting it by a third, and redirecting the cash to debt repayments.

Management attributed almost the entire decline in group adjusted EBIT in FY20H1 to NGPs, which suffered higher trading losses, inventory write-downs and impairments. However, the Tobacco-only EBIT still showed a £12m year-on-year decline, as the low (0.9%) revenue growth was outpaced by operating cost growth. Note also that these figures are after an 1% benefit to group profits from COVID-19-related stockpiling and a stock profit in Australia; the real decline in Tobacco EBIT was likely worse than the £12m figure:

This article was written by

Librarian Capital profile picture
Global, long-term, fundamentally-oriented & concentrated investing. With more than 10 years' buy-side experience, I look at stocks globally and across industries, with a focus on the U.S. and U.K.. My investing style can best be described as "Quality Growth" or "Growth At a Reasonable Price". (previously writing under the name "Blue Sky Capital" until December 2019)

Disclosure: I am/we are long MO, PM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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