Imperial Brands: Revenue Growth Increasingly Price-Driven (OTCMKTS:IMBBY)

Investment Thesis: I continue to rate Imperial Brands as a Hold at this time.

In a previous article back in November, I made the argument that Imperial Brands (OTCQX:IMBBY) needs to see a rise in volume growth across the tobacco segment to justify upside in the stock.

Since then, we have seen the stock appreciate by just over 8% since my last article:

The purpose of this article is to assess whether the recent growth drivers that we have seen in the stock can continue to induce upside.

Performance

When looking at 2024 half-year results for Imperial Brands, we can see that revenue saw a slight decline of -2.3% respectively. However, an increase of 8.6% in tobacco prices had offset volume declines, and we saw an increase in adjusted operating profit and adjusted earnings per share of 2.8% and 7.7% in constant currency terms. According to Imperial Brands, growth of 2.8% in tobacco and NGP net revenue marks the highest rate of organic revenue growth in more than ten years.

I had previously made the argument that a decline in volume across MMC (mass market cigars) has been a drag on revenue growth given that the revenue per cigar is estimated to be 2.6 times that of cigarettes. However, we can see that price growth has more than compensated for the decline in volume growth across both Europe and the Americas, and for the Group as a whole.

While a wholesaler de-stock had negatively affected mass market cigar performance in the previous year, the company reports that segment performance has subsequently improved and benefited from product innovation.

From a balance sheet standpoint, we can see that the adjusted net debt to EBITDA ratio is up slightly to 2.5x from 2.4x in the previous half year.

Additionally, the quick ratio (calculated as current assets less inventories all over current liabilites) remains below 1 and has decreased slightly from that of the previous year.

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Source: Figures (in £ millions except quick ratio) sourced from Imperial Brands PLC Half Year Results Statement: 15 May 2024. Quick ratio calculated by author.

With that being said, we do see that the level of non-current borrowings relative to total assets have also decreased slightly over the past year.

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Source: Figures (in £ millions except quick ratio) sourced from Imperial Brands PLC Half Year Results Statement: 15 May 2024. Non-current borrowings to total assets ratio calculated by author.

Earnings

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the latest half year results statement illustrates a significant rebound in tobacco and NGP net revenue growth – with the former being significantly driven by tobacco price increases.

When looking at the company’s EV to EBITDA ratio, we can see that the ratio has continued to descend lower over the past five years, while EBITDA per share is currently trading at a five-year high.

EV to EBITDA

Moreover, when comparing Imperial Brands to its peers on an EV/EBITDA basis – we can see that Imperial Brands is trading at the lowest ratio, which indicates that the stock could be trading at attractive value relative to its peers.

EV to EBITDA Comparison

When looking at a five-year price chart – we can see that Imperial Brands is currently trading near the upper end of the range.

Some of the appreciation we have seen in the stock is likely to be due to the company’s ongoing £1.1 billion share buyback programme – which is due to be completed this year with £604 million already completed.

In general, we have seen that in spite of rising EBITDA over the past five years – the stock has been trading in a largely stationary manner. In this regard, I continue to take the view that the stock has the capacity for upside going forward – but investors are likely waiting to see evidence that the company can see a rebound in tobacco volumes.

Risks and Looking Forward

In my view, the main risk for Imperial Brands at this point is that growth has been mainly driven by tobacco price increases, with lack of volume growth. While this has resulted in an upward trajectory for revenue up until now, we could see revenue growth flatten out once tobacco prices start to stabilise. In the medium to long-term, we will ultimately need to see a recovery in volume growth in order to bolster revenue.

While NGP sales were up by 16.8% on a constant currency basis – we see that tobacco revenue continues to account for the large majority of revenue for the company.

Moreover, it is notable that when comparing mass cigars versus premium cigars, unit sales for large mass cigars across the United States fell by 3.8% with price per unit up by 5.5%, whereas that of premium cigars fell by 2.7% with a rise of 4.3% in price per unit over the same period.

Imperial Brands no longer operates in the premium cigar business, having sold off its stake in this market in 2020. My reason for mentioning this is that given the effects of inflation on tobacco products – it is possible that we see a drop in demand for mass market cigars going forward, as such products appeal more to price-conscious customers who may be more likely to switch to cigarettes or next-generation products than premium cigar smokers. In this regard, there is a risk that we may see cigarette sales volumes rebound going forward – but mass market cigars that typically account for higher revenue per stick may continue to see a dip in demand.

Conclusion

To conclude, Imperial Brands has seen strong revenue growth as a result of a broad increase in tobacco prices. However, I continue to maintain the view that we will ultimately need to see a rebound in volume growth for the stock to see upside over the longer-term. For this reason, I continue to rate Imperial Brands as a Hold at this time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.