Imperial Brands faces headwinds amid regulatory changes

Can Imperial Brands’ share price recover after Tuesday’s trading statement?

Imperial Brands PLC, the maker of iconic cigarette brands like John Player Special and Gauloises, has seen its share price fall around 10% over the past year. This is despite the company offering investors dividend growth and share buybacks. Will Tuesday’s trading statement lead to a recovery in the British multi-national tobacco company’s share price?

For tobacco companies, regulatory pressure has long been an issue dampening investor enthusiasm. The latest government interventions have focused on Imperial's moves into vaping, with the UK and New Zealand floating plans to ban tobacco sales to younger generations to prevent them from ever starting smoking.

However, some analysts believe the regulatory burden on the tobacco industry is starting to ease after the UK confirmed a tax on vaping products earlier this year.

In March Imperial Brands announced a second wave of its share buy back programme following an update in November, when it said cigarette volumes fell 7.1%, excluding Russia where it has withdrawn from the market. However, prices increased by an average of 11% while its next-generation vaping and tobacco heating products saw sales jump 26%.

For 2023, Chief Executive Officer Stefan Bomhard guided toward revenue growth likely in the low single digits on a constant currency basis, below its ongoing target of mid-single-digit growth. He forecast adjusted operating profit “close to the middle” of the mid-single-digit range. Performance is weighted toward the second half, driven by pricing dynamics last year and ongoing investments in reduced risk products. As such, the first half is expected to see low single-digit operating profit growth at constant currency.

The market currently forecasts a 3.9% volume decline in cigarette sales for the full year, 2% net revenue growth, helped by a 45% increase in next-generation vaping sales, and an adjusted operating profit of close to £4.0 billion.

So while the regulatory environment appears to be improving and Imperial continues working on its multi-year transformation strategy, the company faces ongoing volume declines in its core cigarette business. Price increases and growth in potentially reduced risk products like vaping and tobacco heating will be key to driving profit growth in the years ahead.

Investors need to weigh up declining volumes against the company’s attractive dividend yield of around 8% but the sustainability of payouts as volumes fall requires monitoring.

Analysts recommendations

Fundamental analysts are rating Imperial Brands between a ‘buy’ and a ‘hold’ with LSEG data showing 1 strong buy, 6 buy and 6 hold - with the mean of estimates suggesting a long-term price target of 2,237.78 pence for the share, roughly 32% above the share’s current price (as of 8 April 2024).

Technical analysis on the Imperial Brands share price

Imperial Brands’ share price, down around 5% year-to-date, saw a 6% rise from its 1,662p early March low to last week’s 1,798.5p high before resuming its downtrend.

Since the minor bounce can be sub-divided into three legs, it is likely that it only represented an abc Elliott Wave zig zag correction which means that a fall through the early March low at 1,662p is at hand as long as no currently unexpected advance takes the Imperial Brands’ share price above the early April high at 1,798.5p.

Imperial Brands Daily Candlestick Chart

The odds of the short-term downtrend falling through the 1,662p low will increase of a slip through the mid-March low at 1,695.5p.
Failure at 1,662p would put the October low at 1,553.5p on the map.

Imperial Brands Monthly Candlestick Chart