**Imperial Brands shares are down 18% from their peak and 7% from a year ago.**
We have been cautious on IMB since initiating a Neutral rating in July 2019, instead preferring Philip Morris (“PM”), where we initiated a Buy rating slightly earlier in June 2019.
At present, IMB is far behind. However, there had also been periods in which IMB shares massively outperformed PM shares. With IMB shares now again showing a P/E of just over 8x and a Dividend Yield of \~6%, we see a short-term “value” investment case.
At 2,715p, IMB shares appear attractive on most valuation metrics, including an 8.3x P/E, a 10.1% Free Cash Flow Yield and a 6.1% Dividend Yield. This appears cheap relative to Altria (13.1x P/E and 5.9% Dividend Yield) and British American Tobacco (13.1x and 5.5%). Medium-term targets include constant-currency CAGRs of 3-5% in Adjusted EBIT and “at least high single-digit” in Adjusted EPS; if achieved, these would mean a mid-teens+ annualized return.
FY26 guidance is for the same growth rates as the medium term, and H1 results are consistent with full-year guidance. H1 group Adjusted EBIT growth of 0.6% was the lowest since COVID-19, and Adjusted EBIT fell in 2 of the 3 regions, but there were attributable to one-off headwinds. IMB’s cigarette businesses are not in decline at present.
We are bearish on cigarette businesses, seeing a substantial transition to Reduced Risk Products (“RRPs”) as inevitable over time. This view is based on qualitative reasons, and reported financials do not yet show conclusive evidence.
However, IMB’s H1 FY26 results provided qualitative evidence for our bearish view, with IMB having decided to abandon the U.S. Vapour market, and its other RRPs continuing to be subscale.
The U.S. cigarette market is in flux due to conflicting regulatory currents. Cigarette volumes have seemingly stabilized in recent quarters, thanks to better enforcement. On the other hand, more RRPs are likely to enter the market after the FDA has signalled a willingness to tolerate the sale of products awaiting approvals. The war in Iran is another source of uncertainty, as higher gasoline prices have traditionally pressured cigarette volumes.
Overall, we believe there is a plausible “value” investment case for IMB for the short term, though it is unsuitable for our “quality” style and concentrated portfolio. For this reason, we reiterate our Neutral rating on IMB, but highlight that it may be a Buy for more adventurous investors who follow the “value” style.
*(Note: This is the summary of an article originally published behind a paywall in May; figures have been updated; since then the qualitative aspects of our reasoning have not changed, and Tobacco shares like IMB have only fallen further.)*