Imperial Brands Earnings: Price Hikes and Cost Controls Drive Another Decent Performance

Imperial Brands IMB reported first-half fiscal 2023 results that beat our estimate of operating income, although turnover was a little light. This was a decent quarter and Imperial appears to be delivering on its operational turnaround and seems likely to meet management’s guidance this year and beyond. We are reiterating our GBX 2,900 fair value estimate and believe the current market valuation undervalues the future cash flows of the business and provides an attractive investment opportunity for long-term investors.

On a constant-currency basis, tobacco net revenue fell by 1.0% in the first half of 2023, coming in slightly below our estimates. However, modestly better-than-expected distribution fees in the logistics business made up for the shortfall and the top line was in line with our forecasts. In line with most of its consumer product peers in the current inflationary environment, Imperial’s top line was driven by price increases. The first-half cigarette volume decline of 12.6% was slightly steeper than we had expected and remains higher than large-cap competitors even on a two-year stacked basis, although it should be noted that this includes Imperial’s exit from Russia, and the company remains the only tobacco manufacturer to have delivered on its plan to divest its assets there. In addition, the implementation of price increases of 9.3% is likely to have accentuated the decline, and these price increases may ease in future. If consumer confidence continues to weaken in some key markets we would expect continued pressure on industry volume, but Imperial could be well placed to benefit from trading down due to its portfolio presence in subpremium price categories.

Imperial delivered further cost efficiencies in the first half. Adjusted operating profit, excluding the Russia exit charges of last year, increased by 1.2%, implying 80 basis points of tobacco margin improvement, an impressive achievement in the current environment.