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TEMPUS

Buyback is not the only burning issue for Imperial Brands

: A man uses a vape device in this illustration picture
Vaping products are seen as a way for companies to offset the hit to tobacco revenues
ADNAN ABISI/REUTERS

If the strategy launch from the new boss of Imperial Brands was intended to breathe immediate life into the company and its share price, then — so far, at least — it has failed (Alex Ralph writes). Since Stefan Bomhard unveiled his five-year plan to revive one of the world’s largest tobacco businesses, its stock has fallen by a further 10 per cent.

Imperial, the maker of Davidoff and L&B cigarettes, is a constituent of the FTSE 100, employing about 27,500 people and selling in around 120 markets. The capital markets day presentation, delivered about six months after the former car salesman had joined last July, was pitched against a backdrop of long-term structural problems for an industry under pressure to increase prices and offset declining sales in developed markets. Last year Imperial cut its dividend for the first time since it was floated in 1996 and parted ways with Alison Cooper, its chief executive of nine years.

The underwhelming reaction from the City to Bomhard’s announcement (the shares fell by as much as 5.3 per cent last Wednesday) has been driven in large part by Imperial’s decision to delay launching a share buyback programme. Bomhard, 53, has said that buybacks would have put Imperial’s credit rating at risk and that debt reduction remained the priority. With the focus on deleveraging, capital returns to shareholders are not expected until the end of its 2022 financial year and even into 2023.

Yet there was more to the story than the buyback, or lack of it. Imperial is refocusing investment in its five most important tobacco markets. The United States, Germany, Britain, Australia and Spain represent about 72 per cent of its operating profit from combustible products. It also plans to drive sales in smaller, higher-margin markets such as Africa, and will walk away from a “small number” of others.

As well as doubling-down on its core business, Bomhard’s other key decision has been to scale back Imperial’s ambitions for its fledgling next-generation products, which include its Blu e-cigarettes and Pulze, the heat-not-burn brand. The industry has been turning to vapour and products that heat rather than burn tobacco, but Imperial’s foray into these new areas has been marked by over-promise and under-delivery, a poor performance blamed on insufficient consumer insights and data. To improve this, Imperial is appointing a new chief consumer officer and is taking a more “disciplined” investment approach in its next-generation business.

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In a surprise move, Imperial is focusing investment in its heated tobacco business in Europe and in vaping in “selective” markets, particularly America. The increased investments, including in sales and marketing, of up to £60 million a year will be funded by “efficiency” from simplifying the business, which, it is said, will generate annual savings of about £100 million to £150 million by the end of 2023. The shake-up will cost about £245 million to £275 million, with the majority in 2022, plus non-cash restructuring charges of about £150 million.

The strategy avoids a “major reset” of margins, but operating profit is expected to be flat in 2022 at a constant currency level year-on-year, before profits pick up. The company also has pledged to increase the dividend annually.

However, investors “appear to view Imperial as a ‘show me’ story, given the track record”, UBS has said. Analysis by the Swiss broker suggests that Imperial will not hit its targets and UBS expects flat organic sales growth between 2021 to 2025, below Imperial’s aim of 1 per cent to 2 per cent.

ADVICE Avoid
WHY Fragile confidence Imperial can hit new targets and compete in the vaping and heat-not-burn markets

Polypipe
Although it is becoming the achingly trendy, must-do home renovation, the move towards underfloor heating has sound roots in a home energy revolution — the decarbonisation of residential housing that will lead, in time, to the end of the conventional domestic boiler (Robert Lea writes).

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It is no surprise, therefore, that Polypipe, which has a keen eye for a smart bolt-on acquisition, has spent £27 million buying Nu-Heat. The Devon-based company claims to be the market leader in retrofitting underfloor heating as developers and homeowners weigh up solutions to the government’s drive to green energy propositions.

Polypipe was created by a couple of plumbing mates in the 1980s. It now employs nearly 3,000 people and has about £400 million of annual revenue producing and distributing products for guttering, ground drainage, heating, plumbing and ventilation.

It tells its investors that it is riding the wave of two key markets tied to the alarm over climate change. On one hand, its pipes are crucial to community water management and flood abatement; on the other, it is producing the kit for sustainability and carbon reduction in the home. It is all very environment, social and corporate governance-focused, but any institutional investor and corporate executive will say that such issues are not so much in vogue as a priority.

However, Polypipe is wholly wedded to the travails of the construction industry, which blows hot and cold as an investment proposition. Stephen Rawlinson, a canny analyst of the sector, says that Polypipe is up there with Marshalls, the paving group, as best in class: “You cannot build or refurbish a property in the UK without products from these two companies. They are pre-eminent and have better distribution, product support and marketing than their rivals.”

Shares in Polypipe have not recovered to their pre-pandemic levels. At 527p yesterday, up 13p or 2.5 per cent, the group is trading at 23 times this year’s projected earnings when pre-tax profits are expected to be £62 million. That is a chunky valuation, but reflects the esteem with which the stock is held.

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ADVICE Hold
WHY An investment for the road to zero carbon

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