Vaping blues at Imperial Brands Plc

Imperial Brands Plc

Imperial Brands PLC (LON:IMB) is a United Kingdom domiciled cigarette and lifestyle products co[xyz-ips snippet="flash-news-display"]mpany. Headquartered in Bristol, the company is transforming itself into a fast-moving consumer goods company with a core business built around a tobacco portfolio. The company offers a comprehensive range of cigarettes, fine cut and smokeless tobaccos, papers and cigars and till the US FDA ban of Vaping products was increasingly focusing its attention on expanding its Next Generation Products (NGP) portfolio. The company's business is differentiated in two segments: Tobacco & NGP and Distribution, in Tobacco & NGP verticals, the operations are further divided into Returns Markets North and Returns Markets South.

The shares of the company are listed on the London Stock Exchange, where they trade on its premium main market segment. The shares of the company there are identified and trade with the ticker name IMB. The shares of the company also form part of the FTSE 100 index on the exchange.

News Update

The company on 05 February 2020 came out with an update on the performance of the company for the full financial year 2019-20 and guidance for the forthcoming year.

• The company’s effective adjusted tax rate for the financial year 2020 is expected to be around 21 per cent while for the financial year 2019 adjusted tax rate was at 19.1 per cent.
• The free-cash-flow of the company in FY20 will be affected by some one-off cash outflows in relation to Russian excise tax liabilities and the final deferred consideration for the Von Erl acquisition.
• The company expects its net revenue and adjusted earnings per share in the range of circa 1 per cent at the half-year and circa 3 per cent at the full year 2020, at current exchange rates on account of currency translation headwinds.
• Due to the regulatory uncertainty and adverse news flow in the US and Europe, demand for certain products of the company continues to be affected and the company estimates that this will result in significantly lower year-on-year NGP net revenue as well as increased provisions for slow-moving stock. these events will also result in a full-year net impact on adjusted operating profit of circa £40 million.
• The first half 2020 adjusted earnings per share of the company are expected to be down circa 10 per cent at constant currency on account of the phasing out of vaping product inventory write-downs, primarily relating to the US flavour ban.

Company’s Stock Performance at the London Stock Exchange

Source – Thomson Reuters (five-day price chart)

The stock trading performance of the company from the beginning of trade of 05 February 2020 when the results were released have been volatile, and during the period till 10 February 2020, the shares of the company have lost GBX 54.00 in share price value. On 10 February 2020, the shares of the company were trading on the London Stock Exchange trading at a price of GBX 1,819.20 at the time of writing of this report.

The shares during the past 52 weeks of trading till date at the London Stock Exchange have touched a 52-week high of GBX 2,713.50 while also touching a 52-week low of GBX 1,636.58. The company had a calculated market capitalisation of £17.34 billion on the London Stock Exchange at the time this report was being prepared on 10 February 2020.

The average stock's traded volume as on the above date and time stood at 118,436, and the stock's average traded volume for five days was 3,491,066.20; 30 days- 2,146,008.87 and 90 days – 2,584,183.40 and the beta of the stock of the company on the date was 0.93, which compared to the benchmark index reflected a lower volatility and the stocks trading volumes on the London Stock Exchange on an average for five days was up by +62.68 per cent as compared to the 30 days' average traded volume, and in last one month, the shares have generated a return of -7.1428 per cent and also a return of -2.6216 per cent return on year to date basis.

Outlook

The US DFA ruling has forced the company to write down a significant portion of its inventory. The company, which a couple of years ago had invested heavily and was enthusiastic about the New Generations Product, is now facing a prospect of complete loss of that investment. It will take the company a couple of years to completely recover from this financial jolt.

It is highly unlikely that there will be a reversal in the stance taken by the US FDA on vaping products. Though the company argues that vaping products provide a far safer alternative to combustible tobacco products, but the US FDA has its own set of arguments. There are several lobby groups in the United States who want the rate of addiction among young adults to tobacco and other such harmful addictive substance to come down. They believe this product, irrespective of being more lethal than tobacco or not, will only give rise to more addition among young people.

The tobacco products division and fast-moving consumer products division of the company continue to perform well with no apparent threats. The loss faced on the vaping product category would be more than compensated from growth in other categories should the company take immediate steps regarding the same. The fast-moving consumer goods category especially holds the maximum promise for the company, which could grow in line with the growth rate of the fast-moving consumer goods industry.

There is good prospect; however, for the company to try its hand at cannabis products. There is a renewed interest in this otherwise ill-reputed contraband as a medicine for several hard to treat human ailments. There are many countries that have partially made the substance legal, and a lot of research is going on in the private sector and government-funded organisations to find novel therapeutic usages of this substance.

The delivery of this substance through a vaping device could very well become a high demand product in the not so distant future. The company could save a lot of its investments from going bad if it is able to create something with this new prospective product line.