Unveiling new multi-currency revolving credit facility of €3.5 billion: Imperial Brands Plc (IMB)

Accessing new revolving credit facility (including an initial three-year term and rolling, automatic, bi-annual extensions) of €3.5 billion yielded positive returns to the Tobacco giant, Imperial Brands PLC. It was sourced through a syndicate of 20 banks while coordinated by NatWest, Santander and SMBC. The purpose of this multi-currency credit facility is to bolster the liquidity position amid the Coronavirus pandemic. This was also reinforced by the company’s announcement that there has been no material impact over financial performance and trading so far, during the economic disruption caused by coronavirus contagion and in fact, their distribution business, Logista (serving the European epicentre of Covid-19: Italy, France and Spain) has expanded the finished goods stock and will keep the delivery rolling. Following this, the stock price surged 12% yesterday.

Imperial Brands PLC operates as a consumer goods company, serving tobacco products worldwide, which is managed through three divisions - Europe, the Americas and Africa, Asia and Australasia.

Strategic Positioning

Imperial Brands strategize to possess distinctive sustainable positioning in the market through three identified key areas – Tobacco Maximization, Next Generation Products (NGP) and Cost and Cash:

• Tobacco Maximization – Maximizing contribution through established Asset Brands (includes Winston, Blu, John Player Special, Davidoff Cigarettes, Gauloises, Bastos, among others) to drive growth in priority markets.
• Next Generation Products – Represents a portfolio of vapour, heated tobacco and oral nicotine brands with the purpose of developing alternative products that are potentially less harmful to health.
• Cost and Cash – Maximizing cash conversion by controlling overheads, simplifying operating model with prudent capital allocation.

(Source: Company Website)

Business Model

Imperial Brands PLC create value through two business growth models - Market Repeatable Model and Brand Adoption Model

(Source: Company Website)

• Market Repeatable Model: This model is focused on an established portfolio of existing tobacco brands, maximizing the customer’s needs by matching the best possible tobacco product, sustainable growth through right pricing strategy, keeping the product available at the right place and at the right time, tailor customer solution with retail partners and keep learning the consumer demand with changing scenario

• Brand Adoption Model: It is best known as 4Bs model, representing four aspects for alternative lower-risk products like Vapour:

• Believe: It revolves around building awareness towards alternate and potentially less harmful products with brands like Blu, by creating responsible marketing.
• Buy: It refers to inducing the product into the market by adopting omnichannel approach by ensuring that the products are sold only to adults.
• Buy Again: Generating repurchase value and creating brands loyalty by ensuring the expected product quality and availability.
• Belong: Deepen the connection with NGP consumers and building community (e.g. bluNation loyalty programme) so that consumer never switch back to smoking.

Recent Developments

Let’s walk through the vital trending updates apart from a new credit facility:

• 5^th February 2020: The AGM update announced the US FDA’s ban over certain flavors of cartridge-based vapour devices.
• 3^rd February 2020: Announced Stefan Bomhard to join as Chief Executive Officer from 1^st July 2020.
• 9^th November 2019: Announced Thérèse Esperdy to join as the new chairman of the Board, effected from 1^st January 2020.

Decent Financial Highlights for FY19 Period

• The group's net revenue increased by 2.2 per cent, led by growth in tobacco and Net Generation Product. However, the group’s major tobacco net revenue surged 2.7 per cent on an actual term and by 1.1 per cent on a constant currency basis to £7,713m from £7,510m against the year-over period.
• In Asset Brands, the net revenue increased by 4.4 per cent at constant currency, which is supported mainly by robust growth in blu, Kool, Backwoods, and Davidoff. The several brands include Skruf, Rizla and Premium Cigar, are well-positioned, contributing to revenue growth.
• Led by the weakening of sterling versus the US dollar positively impacted the revenue and earnings by around 2 per cent, the reported earnings per share reduced by 26.2 per cent to 106 pence as compared with the previous year (2018: 143.6 pence). Whilst the adjusted earnings per share was down by 1.6% on a constant currency, but a slight increase on an actual term.
• However, the group’s board approved an additional interim dividend per share of 72 pence and will propose a final dividend per share of 72.01 pence, representing a total dividend per share for 2019 to 206.57 pence.
• Despite the increased investments, the ROIC (Return on Invested Capital) measure is marginally ahead of last year at 14.4 per cent (2018: 14.2 per cent).

(Source: Company Website)

In the financial year 2019, the company faced some challenges, particularly on account of weaker trading conditions in the Next Generation Products. However, the group is focusing on new strategies to drive decent performance in the years to come. For the recent year, the effective adjusted tax rate is anticipated to be approximately 21%, an increase from the previous year (2019: 19.1%). On a current exchange rates basis, the group anticipate a currency translation headwind on adjusted EPS and net revenue of 3 per cent at the full year and 1 per cent at the half-year. As earlier guided, the free cash flow in the financial year 2020 expected to be lower than FY19, including the acquisition of the remaining stake in Von Erl (£120 million) and settlement of Russian tax. The company expect stronger cash delivery in 2021. The group is uncertain about the duration and level of disruption from COVID-19 across the industry at present. Also, the group’s robust tobacco business recorded high margin sales growth and is well-established to handover a profitable growth in the years to come. The company will scale up investment once the regulatory uncertainties improve with more visibility on returns.

Imperial Brands PLC V/S FTSE 100 – 1 Year

Daily Chart as of April 1st, 2020, before the market close (Source: Thomson Reuters)

Imperial Brands’ shares were trading at GBX 1482.00 at 10.08 AM GMT (before market close on 1^st April 2020), reflecting plunge of 0.98% as compared to GBX 1,496.80 (at the market close on 31st March 2020). Stock's 52 weeks High is GBX 2,651.00 and Low is GBX 1,258.20. In the past one week, the stock’s return surged 8.68% whereas 3 months, 6 months and 9 months’ returns were negative and stood at -21.86%, -20.19% and -44.42%, respectively.

In the last 1-year, Imperial Brands Plc share price has delivered negative return of -43.27 per cent as compared to negative 24.98 per cent return of FTSE 100 index.

Business Outlook

• In AGM update (as on 5^th February 2020), the management affirmed that the Tobacco trading stays in line with anticipations, with a weighting to the second half as earlier guided. Led by the weaker than anticipated consumer demand for vapour and the United States FDA’s ban on certain flavours of cartridge-based vapour devices, the company anticipate full-year constant currency Group net revenue to be at a similar level to the previous year and adjusted earnings per share (EPS) to marginally decrease from the previous year. On a constant currency basis, the adjusted EPS for the first half is expected to be down by 10%, driven by the phasing of inventory write-downs.
• In NGP (Next Generation Products), the company’s adverse news flow and regulatory uncertainty continues to impact vapour demand in Europe and the United States, indicating likelihood of slow growth in NGP. For handling several of these short-term uncertainties, the company is executing an additional cost savings programme, which will result in a net effect on 40 million pounds of adjusted operating profit in a full year. Further, the FDA ban has resulted in a write-down of the flavoured inventory, with a first half adjusted operating profit impact of 45 million pounds and in line with the prior estimates. During the medium-term period, the company offers a substantial progress opportunity in NGP division to complement the Tobacco business.
• In the first three months of the year, the Tobacco business had a good start, with market share progress across most of the priority markets. The Europe division in the Tobacco business has gained from price/mix gains. In the Tobacco business, the company stays strong in the United States division. Asia, Australasia, and Africa division have delivered revenue growth, reflecting the sell-through of the Australian duty paid inventory and robust volume performance.