Imperial Brands: Was FY24 as Good as the Market Thinks?

Company Update (IMB LN) (Neutral): We were too pessimistic about IMB’s cigarette business, but structural headwinds have not gone away.

Highlights

• Majority of FY24 EPS growth from buybacks; EBIT grew 2.4% in Euros.

• Op. growth mainly from Europe, which may be cyclical and faces macro risks.

• U.S. cigarette declines catching up with IMB; Americas EBIT grew just 2%.

• NGPs still subscale, at just 4% of group revenues and still loss-making.

• 8.4x P/E and 6.2% Dividend Yield, but we worry about capital loss. Avoid.

Introduction

Imperial Brands (“IMB”) reported FY24 (ending September 30) results on Tuesday morning (November 19). Shares finished the day up 3.1% (in U.K. Pounds), and have now risen by 33.9% in the past year:

IMB Share Price (Last 1 Year)

Source: Google Finance (19-Nov-24).

We have been consistently cautious on IMB since initiating a Neutral rating in July 2019, preferring instead to hold Philip Morris (“PM”) as a core position and, since 2023, British American Tobacco (”BAT”) as a small position. Having PM as the top pick has been correct in the past year, with PM shares gaining 45.7%; but IMB shares also gained 44.5% and BAT shares gained just 26.2% (all figures in U.S. Dollars). We have underestimated the stability in IMB’s earnings, which have benefited from a macro rebound in Europe, downtrading in the U.S. and better sales execution.

Nonetheless, while IMB again reported solid headline results for FY24, we still believe IMB will be a long-term loser in the shift towards Next Generation Products (“NGPs”), and see early signs of this in the more detailed results.

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