Sunday 22 September 2019

Share Watch: Will investment in tobacco industry go up in smoke?


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John Lynch

On the brink of the third decade of the 21st century, I find it impossible to get my head around cigarette smoking.

We've had 60 years and more of restrictive regulation, plain packaging, entertainment and work-place bans, as well as relentlessly punitive excise tax increases. I can actually remember when a 20 pack of cigarettes (untipped) cost the equivalent of 20 cents.

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Now a similar packet of 'fags' costs about 62 times more and I cannot think of another consumer product that has increased quite so much. In addition, no one I know thinks smoking is cool anymore, even those who still smoke. But tobacco is still big business; the product sells in huge volumes around the world and, extraordinarily for some, the future of Big Tobacco appears to lie in the propagation of cannabis.

At least that is what I'm picking up as I throw an investor's eye over the Bristol-based cigarette producer, Imperial Brands ('Imps').

I appreciate some investors are happier to align their investments with their own social values and are happy to wash their hands of tobacco shares. On the other hand there are investors who see an opportunity to grab holdings shunned by others. This column makes no judgment on such a moral dilemma.

'Imps' is the fourth and smallest of the Big Tobacco companies in the world after Phillip Morris, BAT and Japan Tobacco. Previously known as Imperial Tobacco, it changed its name as a nod to modern sensitivity. It still has a global footprint, producing 330 billion cigarettes in its 50 factories around the globe, with brands like Davidoff, John Player and Gauloises.

While 'Imps' is in better shape than some of its customers, the last few years have been hard going. In fact last year tobacco had the worst performance of all FTSE sectors and the business is changing with a frantic search under way for alternative products to shore up its sales as tobacco volumes decline. The company has been ramping up investment, including vaping. It is making progress in Europe and Japan but in the US it is under pressure from Juul, now in the world number one position and with nearly half of the US market.

Another focus of Imps' attention is cannabis. However this generates mixed views among Big Tobacco and Philip Morris is of the opinion it is too risky. Imps does not agree and recently entered the market investing in Oxford Cannabinoid Technologies (OCT), a bio-tech company focused on medical cannabis. Last month it moved again and purchased a stake in Canada's Auxly Cannabis. The deal gives Auxly access to Imps' vaping technology, which is expected to be the fastest growing sector of cannabis products.

The company plans to raise as much as £2bn (€2.2bn)through asset disposals. As part of its divestment programme last April the company flagged up it intends offloading its cigar business, which sells prestige brands like Cohiba, Monte Christo and Romeo and Juliet in 150 countries. Some analysts estimate this could raise £1.5bn (€1.64bn) to reduce its debt.

More conventional activities from Imps last year had revenues of £30bn (€32.7bn) and net income of £1.4bn (€1.54bn). Investors were unhappy when the company decided to scrap its 10pc increase in annual dividends, a target that had been in place for the last decade.

To soften the blow it announced a £200m (€219m) share buyback programme. 'Imps' shares trade in the low £20s - half the value since its peak in 2016.

Investors are very unhappy and a regime change cannot be ruled out. They are also concerned as to the group's debt overhang and its credit rating at the lowest investment grade. This should be reduced with the divestment of its cigar business. If 'Imps' gets the growth in its new products its shares are worth a punt; if not…?

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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