Imperial Brands PLC ADR IMBBY
December 28, 2017 - 5:01pm EST by
scrooge833
2017 2018
Price: 42.17 EPS 1.47 0
Shares Out. (in M): 955 P/E 28.7 0
Market Cap (in $M): 40,268 P/FCF 10.67 0
Net Debt (in $M): 15,866 EBIT 3,541 0
TEV ($): 56,134 TEV/EBIT 15.9 0

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Description

Imperial Brands PLC ADR is currently the cheapest tobacco company in the world.  Stock price came down in 2017 as a result of worries about FDA's plan to regulate nicotine levels in cigarette's and the market's perception that IMBBY has missed the boat on vaping and e-cigarettes.

These worries are not necessarily warranted because 1) the dominant market share that IMBBY and its oligopolistic competitors have means that, whatever FDA does or does not do, the companies will be able to manage the prices and cost to continue generating returns on capital that are better than any other business, 2) the concerns over Imperial Brands being left behind in the e-cigarettes market are exagerrated and the winner cannot yet be ceded at this early stage of this nascent industry (see E-Cigarettes below)

The company's enviable decades long track record of high operating margins, high returns on equity and high cash flow generation put the company in the high-probability rate of continuing the good momentum.  One can buy the ADR, get between 5% to 7% forward dividend yield, wait for sentiment to change and make a 27% to 30% return including dividends in a year. You can be wrong in the timing and the high quality of the business can still generate annualized returns in the low to high teens for you over several years.

IMBBY has at least 15% market share in cigarettes and fine tobacco in many parts of the world.  In UK, they have 45% market share in Cigarettes, and 51% market share in Fine Tobacco. In Italy, they have 24% market share in Cigarettes, and 55% market share in Fine Tobacco.

Cigarette and Tobacco Worldwide Market Facts

 

1 in 3 adult people in the world choose to smoke. 6 trillion cigarettes consumed every year which is equiv to 85% of total tobacco volumes worldwide.The remaining 15% is fine cut tobacco, cigars and smokeless products. The largest cigarette market in the world is China, which is 40% of global consumption. Outside of China, the next biggest markets are Russia and USA. Overall cigarette consumption is declining in Western Europe. Emerging markets outside EU, consumption is increasing as adult populations continue to rise.

 

GEOGRAPHICAL MARKETS THAT IMBBY OPERATE IN:

 

  1. Growth (emerging) Markets are characterized by large profit and/or volume pools. Typically have market shares below 15 pct and see real potential for long-term share and profit growth:  Italy, Japan, Russia, Saudi Arabia
  2. USA Market (through ITG Brands)
  3. Returns (mature) Market where market share is above 15% and manage these strong positions, while driving sustainable profit growth:  Australia, France, Germany, Spain, U.K.

IMBBY'S STRATEGY

IMBBY's long-term strategy is to manage its brand portfolio which consists of Growth and Specialist Brands. Growth brands have strong equity and broad consumer appeal (They are:Davidoff, Gauloises, L&B, Bastos, P&S, News, JPS, Fine, West, Winston). Specialist brands also enjoy strong equity but typically appeal more to specific consumer groups (They are:Gitanes, Jade, Cohiba, Montecristo, KOOL, Drum, skruf, blu, Rizla, Backwoods) IMBBY's priority is to to build the contribution these brands make to our results. Portfolio Brands are a mix of local and regional offerings. Those with strong equity support our volume and revenue progression, while weaker brands are delisted or migrated into higher quality Growth Brands.

IMBBY has a very high success rate when it comes to these migrations, with over 95 per cent of consumers completing the transition from one brand to another. During 2016 IMBBY completed 17 additional brand migrations across multiple markets. A total of 64 migrations were completed from 2016 to 2017. IMBBY has identified significant opportunities to further simplify their brands and products for portfolio optimisation for 2018.

 

Over a decade of high annual ROE's:

 

Below is a table of the company's performance since 2004. The company's ROE has never gone below 10% in each of those years. The current CEO, Alison Cooper, took over in 2011.

 

Annual Data:                            
Fiscal Period 200409 200509 200609 200709 200809 200909 201009 201109 201209 201309 201409 201509 201609 201709
Revenue per Share 23.499 24.293 27.248 31.948 43.462 42.618 43.221 45.367 46.166 45.951 44.895 40.576 37.956 42.146
EBITDA per Share 2.142 3.274 3.435 4.149 3.758 3.703 5.152 5.451 5.784 5.107 5.036 5.085 3.684 5.259
EBIT per Share 1.956 3.065 3.195 3.851 2.79 2.707 4.199 4.522 2.937 3.132 3.477 3.576 1.975 3.358
Earnings per Share (Diluted) 0.952 1.691 1.985 2.341 0.906 1.065 2.309 2.789 1.095 1.471 2.412 2.713 0.867 1.963
EPS without NRI 0.952 1.691 1.985 2.341 0.906 1.065 2.309 2.789 1.095 1.471 2.412 2.713 0.867 1.963
Owner Earnings per Share (TTM) 1.87 2.12 2.04 1.9 2.23 3.24 3 3.31 2.72 2.94 3.7 4.22 2.38 3.74
Free Cash Flow per Share 0.777 1.781 1.165 1.631 1.823 4.42 3.018 3.405 2.9 3.342 3.672 4.026 4.019 3.922
Operating Cash Flow per Share 0.997 2.001 2.215 1.988 2.312 4.833 3.452 3.968 3.424 3.823 4.245 4.408 4.336 4.271
Dividends per Share 0.817 0.953 1.094 1.269 1.268 1.028 1.154 1.41 1.597 1.717 1.896 2.11 1.863 2.145
Book Value per Share 0.251 1.472 1.384 2.89 11.162 10.493 10.768 11.943 9.831 9.163 8.619 8.537 7.28 7.907
Tangible Book per Share -7.306 -6.155 -7.96 -9.906 -23.91 -25.388 -21.312 -20.021 -18.854 -19.299 -17.475 -21.414 -21.098 -19.584
Total Debt per Share 8.367 7.595 9.683 13.236 21.702 19.411 15.866 15.919 15.617 18.232 16.831 22.767 19.104 17.456
Month End Stock Price 21.92 29.08 33.52 45.9 33.38 29.5 29.7 33.55 37.02 37.08 43.39 51.75 51.47 43.25
ROE % 577.7 195.23 137.64 109.18 11.32 9.83 21.71 24.59 10.03 15.43 27.04 31.59 10.95 25.81
ROE % Adjusted to Book Value 6.62 9.88 5.68 6.88 3.79 3.5 7.87 8.75 2.66 3.81 5.38 5.21 1.55 4.72
ROA % 7.02 11.99 12.55 11.55 2.17 2.06 4.7 5.9 2.36 3.2 5.31 5.87 1.86 4.46
ROIC % 16.4 23.65 23.55 21.18 8.56 9.01 10.48 13.59 6.35 10.03 13.54 11.99 8.38 9.72
WACC % 6.47 4.95 5.48 6.38 6.9 5.77 4.96 5.35 4.67 5.91 5.82 5.23 4.35 4.38
Operating Margin % 8.04 11.02 11.23 11.49 7.17 8.81 8.97 9.03 5.31 6.93 7.63 7.86 8.07 7.53
Net Margin % 4.04 6.97 7.29 7.33 2.08 2.5 5.34 6.15 2.37 3.2 5.37 6.69 2.28 4.66
FCF Margin % 3.31 7.33 4.27 5.1 4.19 10.37 6.98 7.5 6.28 7.27 8.18 9.92 10.59 9.31
Debt-to-Equity 33.28 5.159 6.998 4.58 1.944 1.85 1.473 1.333 1.589 1.99 1.953 2.667 2.624 2.208
Equity-to-Asset 0.018 0.102 0.081 0.124 0.216 0.204 0.23 0.25 0.218 0.197 0.196 0.177 0.162 0.183
Debt-to-Asset 0.611 0.529 0.567 0.568 0.419 0.378 0.338 0.334 0.347 0.392 0.382 0.471 0.426 0.405
Gross-Profit-to-Asset % 13.97 15.97 162.62 29.23 19.63 16.55 17.02 17.91 19.1 19.57 19.34 17.95 17.54 20.32
Asset Turnover 1.737 1.721 1.722 1.576 1.043 0.825 0.879 0.961 0.993 1.001 0.987 0.878 0.814 0.956
Dividend Payout Ratio 0.859 0.564 0.551 0.542 1.399 0.965 0.5 0.506 1.458 1.167 0.786 0.778 2.148 1.093
Days Sales Outstanding 29.78 31.1 31.45 33.97 47.12 36.9 35.69 34.85 36.43 35.61 35.24 32.1 31.94 27.85
Days Payable 4.51 4.47 69.07 5.08 24 21.47 20.05 17.95 16.38 16.93 16.98 17.91 15.93 19.08
Days Inventory 31.98 30.65 452.16 31.47 43.57 52.3 48.82 46.38 48.39 51.99 52.21 53.48 57.37 54.03
Cash Conversion Cycle 57.25 57.28 414.54 60.36 66.69 67.73 64.46 63.28 68.44 70.67 70.47 67.67 73.38 62.8

Bullish Case for Emerging Markets

Emerging markets account for 60% of Imperial's volumes, but they represent just 20% of EBIT. Imperial is exposed to some of the largest and highest margin profit pools in the world.

 

#1 Player in Cuban Cigars

Imperial is the number-one player in Cuban cigars.

 

Plain Packaging Legislation

If plain packaging legislation spreads, Imperial's value portfolio may put Imperial as the manufacturer best positioned to benefit.

 

 

E-cigarettes and recent acquisitions

IMBBY owns the vaping brand, blu. The blu brand is managed by IMBBY's nontobacco subsidiary Fontem Ventures and has an established position in the USA and the UK and a growing presence in France and Italy. Between them, these four markets account for over 70 per cent of global e-vapour sales. As well as building sales of blu, Fontem also continues to focus on developing advanced technologies to improve the consumer vaping experience, which is important for the future growth of the EVP category. The regulation of EVPs continues to evolve. We believe a clear regulatory framework to govern the way these products are made and sold is required, and we continue to engage with key stakeholders to support the development of effective legislation.  In November 2017, IMBBY acquired a companynamed Nerudia which makes nicotine infusions for the e-cigarette liquids. Imperial acquired Dragonite's e-cigarette business in 2013 and Austrian e-cigarette manufacturer Von Erl GmbH in July 2017. While all these acquisitions have little revenues, IMBBY is one or two acquisitions away from changing the market's perception of IMBBY being left behind in e-cigarettes.  They at least have a decent B+ record of making acquisitions and they do have the free cash flows to make the acquisitions. 

 

Valuation:

I value IMBBY's ADR at $52, applying a 4.4% dividend yield and 11.5 time EV/Adjusted EBITDA. Revenue growth of over 8% in fiscal 2017. 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Dividend increases

Share buybacks

Sentiment change brought about by any positive news in the e-cigarette space either via an acquisition or organic growth from its blu brand or removal of uncertainty with FDA's nicotine level announcement in August 2017.

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