Considering that demand for her company’s core product is suffering a gradual but unstoppable decline, Alison Cooper, chief executive of Imperial Brands, seems remarkably chirpy. She declares the decline of tobacco volumes (down another 4.1 per cent over the past year) to have been “de rigueur for a long time” and insists that, by investing in the right brands and adopting a consistent price strategy while keeping a vice-like grip on costs, tobacco can continue to produce “shedloads of cash”.
The cash is what attracts investors to Imperial, specifically its pledge to grow the dividend by at least 10 per cent per annum while reducing its debt pile — down from £13.9 billion at the half-year to £12.1 billion. Yesterday, it completed its ninth year of 10 per cent dividend growth and Ms Cooper promised to make it ten in a row this year. With the group converting 91 per cent of profits into cash, there seems little prospect of the promise being disregarded any time soon.
Despite this, the share price has been weak, thanks in part to the announcement in July by the US Food & Drug Administration that it planned to push down nicotine levels in cigarettes. Although in theory a negative for Imperial’s American business, which accounts for 25 per cent of sales, analysts reckon that the slow pace of consultation and implementation means that it could take a decade for the new policy to be introduced.
Ms Cooper says that with Imperial having only 10 per cent of the US market, way behind British American Tobacco and Altria, it can target the remaining 90 per cent with its next generation products (NGP), which consist almost entirely of vaping kit.
Although Imperial is behind its peers in the global NGP race, Ms Cooper reckons that in Blu it has “one of the best e-vapour brands in the world” and said that the company would be investing about £300 million in NGP over the next 12 months. Although it is conducting a trial of heated tobacco products, e-vapour remained the big opportunity and that was where the bulk of its NGP investment would be focused.
Unlike Philip Morris International, which is nailing its flag to a smoke-free mast, Imperial is firmly focused on maximising the opportunity from old-fashioned cigarettes, fine-cut tobacco and cigars. Yesterday’s full-year numbers show that while its total volumes fell by 4.1 per cent, its so-called growth brands lifted volumes by 5.5 per cent as the performance of JPS, West, Winston, Davidoff and Gauloises Blondes benefited from investment in priority markets such as Britain, Germany, Italy, Japan, Australia and America.
Imperial grew its market share in seven of its ten priority markets, including the UK, where Ms Cooper said it had responded to regulatory changes by simplifying its portfolio, focusing on fewer brands, notably Players, and improving distribution.
Although the environment remained challenging, it had mitigated the impact with £130 million of cost savings while the pace of volume decline slowed from 5.7 per cent in the first half to 2.6 per cent in the second. A positive currency impact helped net revenues to rise by 8.2 per cent to £7.7 billion, a 2.6 per cent decline at constant exchange rates, while adjusted operating profits rose by 6.2 per cent to £3.8 billion, down 3.2 per cent at constant currency.
All of which has left Ms Cooper and colleagues scratching their heads over why Imperial, on a multiple of 11 times earnings, is the lowest-rated stock among consumer staple peers. Mind you, if it remains so lowly rated, there is always the possibility it could attract a bid from a rival.
ADVICE Buy
WHY Not for the ethically minded, but investors who aren’t put off would be hard-pressed to find such a reliable, cash-generative business
Fevertree Drinks
How could we have doubted it? The recent fears over trading that had sent the Fevertree Drinks share price plunging by 25 per cent from its high of £25.35 a couple of months ago were well and truly dissipated yesterday by yet another forecast-busting update.
The premium tonic and mixers group said that it expected its full-year results to be “materially ahead of current market expectations” (the 11th upgrade in a row since it floated three years ago) and the shares duly regained their fizz, leaping by 292p, or 14.9 per cent, to £22.53, valuing the company at £2.3 billion. Not bad, given its issue price of 134p.
The recent share weakness is probably symptomatic of the wider febrile nature of the markets. Nonetheless, analysts had highlighted the recent (belated) push by Coca-Cola Schweppes into the posh end of the tonic market as a threat to Fevertree. The Coke bottler claimed that the introduction of a premium range called Schweppes 1783 was the biggest British launch in its 234-year history.
Tim Warrillow, co-founder and chief executive of Fevertree, was dismissive of Schweppes’ move, claiming that most of its rival’s marketing efforts were actually going into the relaunch of its mainstream brand rather than its new premium variant. He said that although mixers were now the fastest-growing part of the UK soft drinks market, Fevertree was behind that increase, accounting for 97 per cent of the value growth in retail over the past 12 months.
Although Fevertree is growing rapidly overseas, selling in upwards of 70 countries, the driver of the latest upgrade was Britain, which is leading the posh gin charge. Fevertree now has a remarkable 35 per cent share of the off-trade.
The company is not resting on its laurels and is continuing to use its resources (it had net cash on the balance sheet of £40.5 million at the half-year) to launch new products. It has just introduced a clementine-flavoured tonic with cinnamon for the festive season, while its new range of mixers aimed at the dark spirits market is showing promise, albeit that it is still early days.
ADVICE Hold
WHY Despite the valuation multiple of more than 50 times 2017 earnings, the growth story shows no sign of fizzling out.
