Tobacco multinational Imperial Brands PLC (LSE:IMB) is gearing up for its pre-close trading update on 5 October amid a drastically changing landscape in the contentious industry.
Recent research from Barclays sees the cigarette industry declining 3% per annum on an earnings (before interest and tax) basis, though growth in NGPs (or next-generation products, comprising vapes, heated products and other cigarette alternatives) could balance this out.
That said, vaping comes with its own headwinds, with government proposals aiming to cut down on disposable products and underage vaping on the horizon.
Therefore, long-term Imperial Brands investors will be eager to see how the firm intends to adapt to these changes.
NGPs grew by 19.8% in Imperial Brands’ last interim period, but they remain a mere fraction of the group’s revenue mix (7%, to be exact).
Notwithstanding the ethical dilemma around investing in harmful tobacco products, Barclays analysts see Imperial Brands as a potential income play, with share repurchases set to ramp up in the years ahead.
“Imperial Brands has a progressive dividend policy, which is more linked to the underlying business growth (i.e. EBIT growth) than to EPS growth,” said analysts.
“We think Imperial Brands can now emerge as a clear value play with a significant cash-return story,” said the bank, predicting that share repurchases could step up as EBIT growth creates balance sheet capacity, while also paying an 8% dividend yield.
On the earnings front, Imperial Brands expects to post an operating profit at the lower end of its mid-single-digit range on a constant-currency basis.
Year-end gearing in terms of adjusted net debt to EBITDA is expected to range between two to 2.5 times, with a full-year tax burden between 22% and 23%.
At current rates, foreign exchange translation is expected to add 3% to 4% tailwind to full-year net revenues, adjusted operating profit and earnings per share.