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Questor: Imperial Brands takeover talk may be smoke and mirrors, but it will lift shares
There are many criticisms that can be levelled at the tobacco industry, but paying its fair share of tax is not one of them. Imperial Brands, home to smokers’ favourites JPS, Gauloises Blondes and Lambert & Butler, hands over more than £17bn annually in direct and indirect taxation around the world. With the introduction of a minimum excise tax in the UK next month, you might expect the Exchequer’s overall haul to go up. Unusually, this measure is forecast to have negligible impact on total tax receipts.
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But making manufacturers pay a minimum £5.37 of duty per pack will certainly affect Imps’ domestic business. Even though the extra burden will be borne by heavy smokers of cheap cigarettes, the company has a leading market share to defend, especially at the bottom end where promotional activity is likely to increase.
Analysts at UBS forecast a big impact. Never mind plain packaging – which is on the way too and designed to replace sleek brand imagery with on-pack images of corroded body parts – it is minimum excise that is most responsible for the investment bank’s expectation that Imps’ UK volumes will slide 10pc this year compared to a typical decline of 3pc.
Are concerted efforts to stub out the tobacco industry poised to succeed? That is still a long way off. Smoking is the filthy habit that has made investors filthy rich over the years. Leaving aside Imps’ little local difficulty – the UK accounts for 12pc of group sales – there are still 1.1bn people around the world puffing away. Although volumes have been declining, population growth means that smoker numbers will be little changed in 2025, the World Health Organisation predicts.
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It is a situation that Imps’ chief executive Alison Cooper has learned to live with during 18 years at the business. Squeezing the supply chain to divert more cash into marketing has become a way of life. Her latest wheeze, to invest an extra £300m this year in the company’s biggest brands, spooked the market because it is expected to hit sales and profits in the first half. Investors will see the effect when interim figures are released on May 3, as well as how the company has been benefiting from weak sterling. They should be comforted by a commitment to grow the dividend by 10pc annually.
There is also a feeling that Imps is behind the curve on new technology. Cooper favours e-vapour devices under the blu brand and sells into the four markets that command three-quarters of global sales. But Imps has been less excited about so-called heat-not-burn technology, which claims to offer more smoking-like pleasure than vaping but fewer toxins.
What is less well understood is the opportunity Cooper has in the United States, where she picked up the rights to several new brands two years ago. The market accounts for 20pc of group sales now. There is a chance to drive up prices and win customers.
All of this activity depends on Imps not being swallowed up. The tie-up between British American Tobacco and Reynolds has painted it as a £36bn minnow in a sector led by giants. In February, Exane BNP Paribas claimed there was only a 30pc chance that Imps would be independent by the end of next year. The likeliest bidder is Japan Tobacco, which has a desire to diversify beyond its key markets. What is surprising is that takeover talk has yet to puff up shares. Questor rated Imps a buy at £38.21 last November and they have made little progress since. Eventually, they will go higher, even if takeover talk proves to be only smoke and mirrors. Buy.
Questor says: BUY
Price: £37.49
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