It’s hard to imagine a market in a more obvious state of long-term structural decline. No matter how many young smokers light up in the world’s emerging economies, the use of traditional cigarettes is on the way out.
So imagine the excitement of the world’s Big Tobacco companies at the swelling ranks of vapers, or users of alternative nicotine-based smoking tools that are considered to be less harmful than cigarettes. Imperial Brands is one of two FTSE 100 companies at the centre of this transformation in the use of tobacco and tobacco-free products.
Though it can trace its roots to 1786, Imperial Brands effectively was created in 1901 through a merger of 13 family businesses. Listed in 1996, it produces more than 125 brands of cigarettes and rolling tobacco, which it sells in more than 160 countries. It has about 32,000 staff and in the year to the end of September it made pre-tax profits of £1.82 billion on revenues of £30.5 billion. It has a market share in cigarettes of about 14 per cent and produces brands including Gauloises, Winston and Davidoff.
Its main “new generation product” is the vaper Blu, an alternative smoking tool. Vaping is 95 per cent safer than traditional smoking products, although it is not entirely risk-free, according to Public Health England.
Any investor considering buying shares in any of the tobacco companies still needs to be comfortable that the core product they produce is essentially a legalised killer or destroyer of lives. Tobacco kills more than seven million people a year, including 890,000 non-smokers who are exposed passively to users’ fumes, according to figures from the World Health Organisation. It notes that there are more than 4,000 chemicals in tobacco smoke, of which at least 250 have been proven to be harmful and more than 50 are known to cause cancer. Still, for adults, it is a legal right.
Those who get past that hurdle are faced with other questions. First, the long-term decline. The WHO predicts that the prevalence of smokers globally will have fallen from 26.9 per cent in 2000 to 18.7 per cent by the end of next year and to 17.3 per cent by 2025.
Imperial Brands estimates that cigarette volumes are falling at a rate of 3 per cent to 4 per cent. This predictability has been part of the traditional allure of tobacco stocks. There are about a billion smokers worldwide and the global tobacco market is worth about $780 billion. With the decline a slow one, cigarette-makers can generate large amounts of cash and be reliable distributors of dividends to shareholders for a while yet. Imperial Brands’ shares, which closed up 47½p, or 2 per cent, at £26.22½ yesterday, trade on a multiple of a mere 8.8 times Barclays’ forecast earnings for a dividend yield of a bumper 8 per cent.
Then there is the rise of the e-cigarette in its numerous forms, estimated by Imperial Brands to be worth $17 billion, rising to as much as $50 billion by 2025. That’s an already multibillion-pound market more than doubling in five years.
The group is putting about £1 billion into its next-generation products, which includes Skruf, an oral product, and it reckons that the area will become profitable this financial year. There is, however, uncertainty about future regulation of these new products, with the worldwide rulebook at an early stage. Authorities, particularly in America, are worried about the spread of vaping among young people.
This particular (nicotine-addicted) columnist is not comfortable investing in Imperial Brands given its line of business. However, for those seeking income and who are comfortable, there can only be one recommendation.
ADVICE Buy
WHY The shares are cheap, offer a handsome dividend and it has developing markets
Clinigen
That is some share price reaction. Clinigen, an Aim-listed company that sells and supplies medicines, agreed a deal yesterday to buy the American distribution rights to a skin and kidney cancer drug that generated revenues of only $60 million in its latest financial year. The price tag was up to $210 million, only $120 million of it upfront. The takeover will “modestly” improve Clinigen’s earnings this year and the acquisition remains contingent on the consent of regulators in the United States, likely to take until April. In reply, the shares rose 134½p to 872p, an 18.2 per cent gain that added more than £177 million to the company’s market value.
Clinigen was founded in 2010 through the merger of three companies and that same year acquired its first medicine, Foscavir, an anti-viral treatment. It has three lines of work: supplying comparator drugs to clinical trials, distributing unlicensed treatments and buying licenses, often those unwanted by multinationals keen to offload non-central medicines. It was listed on the junior market in 2012 for 164p.
The company bought the US rights yesterday to Proleukin, until then owned by Novartis, of Switzerland. The drug is being used in roughly 80 studies into multiple diseases and Clinigen, which already owns the license to sell Proleukin in the rest of the world, reckons that it has the potential to be an integral part of cancer therapies involving multiple drugs.
That opportunity, plus a price tag that at three and a half times annual revenues hardly feels stretching, might help to explain the euphoria in the shares. The acquisition, which marks a big expansion in the US for Clinigen, looks smart. The advanced cancers that Proleukin is aimed at are not well served and the additional debt that it has taken on to fund the deal looks manageable.
The shares, at 13.4 times Peel Hunt’s forecast earnings, yield only 0.9 per cent, but that is because the company sees itself as a growth business and would rather reinvest than pay out profits. Its volatile price suggests that growth is not yet reliable. The company is very interesting; the shares are not.
ADVICE Avoid
WHY Compelling business model but shares don’t obviously offer value
