Could Imperial Brands' shares recover?

Imperial Brands unveils half-year figures this week. The tobacco giant is making headway in moving customers onto its next generation vaping products but has been hit by currency headwinds.

The company said at its pre-close trading update in April that it is on track to meet analyst expectations for the full-year. However, first–half operating profits are expected to remain at the same level as last year in a constant currency basis. Revenues have been hit by the company’s expensive exit last year from the Russian market, as well as its major investment in its vaping product portfolio.

What’s more, the so-called ‘Covid unwind’ is still affecting its profit levels. Customers tended to smoke more during the Covid lockdowns and this theme is lessening now as life returns to normal. Currency fluctuations are also anticipated to be a 6.5% tailwind on earnings per share in the first-half and 2.5% to 3.5% in the second half.

Imperial: superior pricing?

However, revenues are forecast to pick up in the second half of the year. Meanwhile, analysts are wondering if the company’s superior pricing power will continue amid the inflationary environment. Imperial managed to increase prices by 6% in 2022 to make up for a 4.8% drop in cigarette volumes. Analysts expect volumes to fall by 5.6% this year, while the withdrawal from Russia will also negatively affect this.

“The FTSE 100 firm’s array of key brands, which includes JPS, Davidoff and Gauloises, still confers some degree of pricing power, despite regulators’ restrictions on packaging and advertising,” said analysts at AJ Bell. “Analysts expect an increase in the full-year dividend for 2023 as well, so they will be looking for an advance in the interim payment, too.”

Imperial said in its pre-close statement that pricing remained “robust” and its aggregate market share was “stable” across its five main combustibles markets.

Besides a possible uplift in dividends, analysts will also be looking at the company’s net debt levels, which are expected to fall. In the pre-close update, Imperial said full-year leverage is forecast to remain at the lower end of its 2.0-2.5 range for net debt to EBITDA (earnings before interest, tax, depreciation and amortisation).

Meanwhile, the company says it has paid out just over half its £1 billion share buyback programme - £523 million – which represents 2.7% of its share capital.

Could Imperial’s shares have further to rise?

Imperial’s shares initially had a good run this year – up 10% - but have begun to fall back in the past month. Analysts at Deutsche Bank Aktiengesellschaft, who have a buy recommendation on the shares, set a price target of 2325p in November, while those at Jefferies, who have a hold recommendation, recently set a price target of 1993p.

At 1,885p, the shares are worth buying, not least for the generous 7.5% dividend yield and share buyback programme. The shares are an attractive option given the high inflation environment. Imperial announces half-year figures on Tuesday 16 May.

Past performance is not a guide to future performance