Market news and an update from Imperial Brands.

Market News

US equity markets closed higher last night – S&P 500 (+0.8%); Nasdaq (+1.4%) – after the ADP National Employment Report showed US private payrolls increased far less than expected in September, with 89,000 jobs gained during the month. Meanwhile, President Biden announced he has approved an additional $9bln in student debt relief. The 10-year Treasury yield fell back to 4.76%, down from yesterday’s high of 4.88%. Gold is $1,823 an ounce.

This morning in Asia, markets also moved upwards: Nikkei 225 (+1.8%); Hang Seng (+0.4%); Shanghai Composite (closed). The FTSE 100 is currently little changed at 7,412. Companies trading ex-dividend this morning include Smith & Nephew (1.22%), Centrica (0.90%), and Weir (0.97%).

Brent crude fell 5% yesterday, weighed down by a weakening demand outlook. Meanwhile, OPEC+ made no changes to the group’s output policy, following Saudi Arabia and Russia’s decision to extend voluntary supply cuts until the end of the year. The S&P 500 Energy Industry Group GICS Index fell by 3.4%. This morning the price has recovered slightly to $86 a barrel, but still $10 below last week’s high.

China’s growth forecast this year was raised to 5% by Citi as promising data helps build consensus around the nation’s ability to achieve its official target. The bank’s previous 4.7% forecast was among the more bearish.

The Bank of England’s Decision Maker Panel survey today will provide fresh clues on inflation trends. Last month’s report showed UK firms expect to raise prices at 4.4% over the following 12 months, the slowest pace in almost two years. Sterling trades at $1.2144 and €1.1554.

Bets against US regional lenders are piling up, with short interest as a percentage of outstanding shares in the SPDR S&P Regional Banking ETF jumping to 37%. That’s higher than the level hit after SVB failed in March.

Source: Bloomberg

Company News

Imperial Brands has this morning released a trading update which highlights it is on track to deliver full-year guidance and has announced a further £1.1bn share buyback. In response, the shares are up 2% in early trading.

Imperial Brands manufactures and sells cigarettes, fine cut tobacco, smokeless tobacco, cigars, and next generation products (NGP). The main brands include Winston, Davidoff, L&B, West, and JPS. The group’s five-year business plan is focused on three pillars, with investment focused on markets and brands with the greatest opportunity for value creation. The aim is to deliver a gradually improving trajectory in net revenue, with a CAGR of c. 1%-2% for FY2020 to FY2025.

The primary driver of medium-term value creation is a revitalised tobacco business focused on the group’s top five (priority) markets – US, Germany, UK, Australia, and Spain – which represent 70% of combustible operating profit. Although this means there is some concentration risk, the company believes they are attractive markets, especially Germany and the US which are very ‘affordable’ proving scope to increase price.

The second strand focuses on the broader tobacco portfolio where there are additional opportunities to drive growth whilst realising operational efficiencies. Finally, the group is building a targeted NGP business focused on heated tobacco in Europe and vaping in selective markets, particularly the US. Investment is disciplined and based on detailed market testing. Overall, rather than trying in vain to out-compete its larger rivals, we believe Imperial is now operating within the confines of what is achievable for a number four player in a concentrated global market.

The group’s five-year plan is divided into two distinct periods. The two-year strengthening phase (2020-2022) built the foundation for the current three-year phase (2022-2025) which focuses on the acceleration of returns and sustainable growth in shareholder value. In this phase, the company expects to generate low single-digit net revenue growth and mid-single digit adjusted operating profit growth, defined as 3.5%-6.5%.

This morning, Imperial has said it is on track to deliver in line with its previous full-year guidance. On a constant currency basis and including Russia in the prior-year comparator, tobacco and NGP net revenue is expected to grow in the low single digits. Adjusted operating profit growth is expected to accelerate to the lower end of the mid-single digit range.

The group has generated a further modest gain in the aggregate share for its top-five markets over the full year. Like the first half, the US, Spain, and Australia are expected to show market share growth, more than offsetting declines in Germany and the UK. This has been achieved while delivering strong pricing across all five markets, reflecting recent targeted investments.

As anticipated, at constant currency, tobacco net revenue growth improved in the group’s second half, as continued strong pricing helped to offset the relatively higher volume declines against historic averages. Tobacco net revenue growth has remained strong in Europe and the AAACE region, more than offsetting declines in the US.

NGP revenue growth has accelerated in the second half of the year, driven by strong growth in Europe. In all categories of next generation products – vape, heated tobacco, and oral nicotine – the group delivered a step-up in product and market launches during the year. Following a positive regulatory outcome, the group is on track to launch its new modern oral production in the US early in 2024.

Regulatory issues remain an overhang – we note yesterday’s announcement of proposed UK tobacco control measures – while a lack of market share improvement in Germany remains a concern.

The business typically generates strong cash flow which drives four pillars of capital allocation: investment in organic growth; strengthening the balance sheet; a progressive dividend; and share buybacks. The group remains on track to deliver financial gearing of around 2.0x net debt to EBITDA by the year-end and plans to maintain this level of gearing going forward. The group remains committed to its investment grade credit rating.

In line with its capital allocation policy and reflecting management’s confidence in the group’s strategy and cash generation, Imperial is today announcing a further buyback of up to £1.1bn of shares between now and the end of September 2024. This represents almost 8% of the group’s share capital based on yesterday’s market closing share price and comes on top of last year’s £1.0bn buyback. This commitment forms part of an ongoing, multi-year buyback programme that will deliver a material reduction in the capital base over time.

The dividend policy is to grow the payout annually, considering underlying business performance. Last year, the £1.3bn cost of the payout was twice covered by the £2.6bn of free cash flow. Taking dividends and the buyback together, Imperial expects capital returns to shareholders will exceed £2.4bn in the coming fiscal year, representing around 17% of its current market capitalisation.

Source: Bloomberg