Business World

Saturday 24 February 2018

Smoking still big business as Imperial targets China

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'The recent tobacco industry consolidation presents Imperial with big problems.' (stock pic)
'The recent tobacco industry consolidation presents Imperial with big problems.' (stock pic)

John Lynch

A former US surgeon general, Everett Kloop, his country's foremost promoter of public health in the 1980s, maintained that "cigarette smoking is clearly identified as the chief, preventable cause of death" in the US.

It was not as if the warnings were new. James I, the 16th-century Stuart king who was a contemporary of William Shakespeare, had concluded that smoking was "hateful to the nose, harmful to the brain and dangerous to the lungs". Despite these and many more warnings, a staggering 5,000 billion cigarettes are currently being sold around the world.

Tobacco is still big business and the company we are looking at today is one of the top four companies in the world peddling the 'demon weed'. However it has recently decided to drop the word 'tobacco' from its name. It is now a sanitised Imperial Brands and the number four in its industry after British American Tobacco, Japan Tobacco and Philip Morris International.

In an era where chaps in posh London gentlemen's clubs could share with each other large trading monopolies (over a glass of vintage port), Imperial Tobacco agreed a non-competing arrangement with its US rival, American Tobacco. The pair decided that markets beyond their territories would be controlled by a joint venture called British American Tobacco. Cosy deals like these could not survive. Thirty years ago Imperial became part of the conglomerate, Hanson Trust. However, within a decade it was back on the London Stock Exchange.

The recent tobacco industry consolidation presents Imperial with big problems. Its current CEO, Alison Cooper, is of the opinion that further consolidation is "not impossible but difficult". As a result it has decided to pump £300m (€340m) into its growth and specialist brands - like best-sellers John Player, Gauloises and Davidoff.

In addition, the company holds specialist products including cigars, snuff, and loose tobacco with brand names like Montechristo, and Golden Virginia. Another is Blu, an e-vapour product.

Imperial is also splashing the cash to expand its global footprint and early this year announced a joint venture with China Tobacco to promote Davidoff and other brands. China alone has an astonishing 350 million smokers (the entire population of the USA).

Many doctors around the world have been shouting for over half a century and more, that the tobacco firms are slowly killing off their customers and for that reason there is a red flag warning in relation to the industry. In spite of relentless rising taxes, public health education, advertising bans, plain packaging, increased regulation, tobacco has remained a multibillion-euro business and tobacco concerns have puffed along steadily, delivering handsome dividends.

In the last few months, big tobacco has been shaken by the US Food and Drugs Administration. The FDA announced plans to cut the amount of nicotine in cigarettes to "protect lives and cut substantial costs of healthcare". This is another of the oddities of the Trump administration, because the very same regime has rolled back on factory emissions and the Paris Climate Accord and seems now to be proposing new rules in relation to personal pollution.

It must be said that Imperial Brands is in better shape than some of its customers. While overall sales fell, tobacco net revenue (a measure that excludes taxes, and excise duty) was £7.2bn, up 10pc. Pre-tax profits and earnings per share were up on the previous year driven by cost savings and currency movements.

Imperial shares have taken off in the last three years and marched steadily up to £41 but slipped in the past year to £33, giving it a market value of £31bn, on a modest P/E of 13. Investors were happy that dividends were 155p a share, an increase for the ninth year running. The group's capital discipline is driving free cash flow and reducing debt.

Meanwhile, the gossip is that Japan Tobacco might arrive with a takeover bid.

But, as of now, Imperial shares are attractive only as an income bet.

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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