Tuesday, 5 November 2013

Imperial Tobacco - not spluttering

I have talked about the Tobacco sector frequently on the site, most recently the US company Altria at this link here

Imperial Tobacco results had many of the usual characteristics of the tobacco sector:  limited top-line growth, a mid-single digit earnings increase due to internal efficiencies and leverage, but a bigger proportional dividend hike (the shares yield nicely over 5% currently). 

Imperial Tobacco formally unveiled a new way of looking at their business, splitting it between 'growth/specialist' and 'returns' (i.e. cash cows).  As shown below, the split between the two on revenues is currently 32%/68%.  The split on profits currently is nearer 25%/75%. 

As noted below, the growth/specialist brands include smokeless, cigars and roll-your-own brands as well as cigarettes. 

In terms of markets, we should not be too surprised by the definition of 'growth' versus 'returns', although you do not often find Italy lodged in the growth set!

Inevitably there are ongoing cost cutting efforts by the company.  With non-GAAP operating profits at £3.2bn, these improvements are not huge, but in the context of the aforementioned flattish top-line, very welcome.

Imperial Tobacco shares have not had the strongest last year, so is there still value?

Well an EV of just under £32bn puts the stock on a static FY13A EV/ebit of x10.  The free cash flow yield of the company is just over 7% and this is all paid out (5%+ dividend, the rest in buyback).  Cash conversion also has the scope to improve further (currently 86%). 

Roll the numbers forward another year and Imperial Tobacco shares should once again re-attain the £25+ level. 

Medium-term, it is noteworthy that the geographic orientation / portfolio is mature versus some other tobacco companies, but this is countered by the lower valuation versus a BAT for example.  Additionally rumours continue to persist regarding a joint bid for Imperial to break it up by BAT and Japan Tobacco although I do not place any value on such rumours per se. 

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