Despite reports that vaping could spell the end for cigarettes, and despite a fall in volumes, Imperial Tobacco is upbeat about the outlook.
The company, whose brands include Gauloises and John Player Special, reported flat revenues in the first nine months of the year while volumes fell 6%. Excluding Iraq, where the current security problems hit demand, revenues rose 1% and volumes were down 4%.
But its so-called growth brands saw revenues rise 14% and volumes up 10%, while the company is expecting good performances from the US brands it recently bought for around £4.6bn in the wake of the merger between Reynolds and Lorillard. The deal brought Imperial the Winston and Maverick brands, as well as e-cigarette Blu.
Chief executive Alison Cooper said the US acquisition had made a good start and added:
[We are] on track to deliver against full year expectations and to create further sustainable value for our shareholders.
Panmure Gordon analyst Jonathan Leinster issued a buy note, saying:
Management states ‘underlying’ volume declined 6 % in the 9-month period to end June 2015, which implies that volume declined approximately 8% in the discrete third quarter period. The third quarter underlying volume decline compares to broadly flat for Japan Tobacco, down 1.4% for Philip Morris and down 2.2% for BAT over the same period.
Management does note that volume declines ex-Iraq is slightly better than their market footprint implying market share is roughly flat.
We rate the stock a buy with a price target of 3800p. We do not believe the third quarter update will lead to any significant change in consensus adjusted earnings per share expectations because although underlying volume decline and price/mix are below our second half expectations, price/mix is strong and there in a further nonparticipating manufacturer rebate in the US market.
Our full year 2015 adjusted earnings per share estimate is around 1% below consensus, and we have to estimate the part year contribution from the acquired US operations.
We continue to believe the positive impact of the US acquisition on group cashflow is under appreciated by the market allowing 10% dividend growth per annum to be sustained for many years. We further believe cost savings from the US acquisitions will be considerable (estimated £150m) given the management the option to either reinvest in growth or improving the bottom line or both.
Imperial’s shares are currently up 3p at £32.43 in a falling market.
