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Imperial Brands PLC IMBBY

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Morningstar’s Analysis

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We Lower Our Valuation Slightly but Retain Our Conviction in Imperial Brands as a Buying Opportunity

Analyst Note

| Philip Gorham, CFA, FRM |

After digesting Imperial Brands' new five-year strategic plan, we are tweaking our assumptions and lowering our fair value estimate to GBX 3,000 from GBX 3,400. Our lower valuation reflects what we think are realistic assumptions based on Imperial's position in the marketplace: a highly cash generative business, but a company not in a position to drive industry growth. It does not imply a material change in view, and we still regard Imperial as being grossly undervalued. The stock trades at less than 9 times forward earnings and offers a dividend yield of 10%, even when last year's dividend cut is annualized. The tobacco industry faces a structural decline in its core business, and it is fair to say that Imperial Brands will not be at the forefront of the shift to next generation products. However, with tobacco operating margins north of 40% and very high cash flow conversion rates of close to 100%, we expect the business to continue to generate a great deal of cash, and this is not being fairly reflected in the current market valuation. In fact, for the first time in a few years, Imperial has a realistic roadmap to better financial performance, that if delivered, has the potential to support a rerating of the stock to earnings multiples closer to historical averages in the midteens range.

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Company Profile

Business Description

Imperial Brands is the world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2020 volume of 239 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories. Recent acquisitions in the United States make Imperial the third-largest manufacturer in that market. Through its acquisition of Altadis, the firm has a logistics platform in Western Europe.

121 Winterstoke Road
Bristol, BS3 2LL, United Kingdom
T +44 1179636636
Sector Consumer Defensive
Industry Tobacco
Most Recent Earnings
Fiscal Year End Sep 30, 2021
Stock Type
Employees 32,500