Morning Note: Market news and an update from Imperial Brands.

Market News

US equities fell last night – S&P 500 (-1.0%); Nasdaq (-1.2%) – on rising geopolitical tensions and technology sector weakness. With the exception of energy shares, every major sector in the S&P 500 dropped. Alphabet slipped following a negative legal decision that will allows developers to set up rival marketplaces that compete with its Google Play Store.

The Fed’s John Williams told the FT the September jobs report was “very good” and he thinks the central bank is “well positioned” to pull off a soft landing. For the first time since 1 August, money markets imply fewer than 50 basis points of Fed rate reductions through the end of the year. The 10-year Treasury yield topped 4%, while gold slipped to $2,636 an ounce.

In Asia this morning, markets were very weak as investors counting on Beijing to produce more stimulus were underwhelmed: Nikkei 225 (-1.0%); Hang Seng (-7.1%). The Shanghai Composite rose by 4.1%, playing catch-up after the Golden Week holiday. The World Bank has warned China’s slowdown may deepen. Early indications of tourism spend during China’s Golden Week look positive. There was a 60% increase in outbound travel transactions and a 120% rise in inbound tourism.

The FTSE 100 is currently trading 1.0% lower at 8,220, with mining stocks falling heavily. According to the BRC, UK like-for-like retail sales rose by 1.7% in September, well above the 0.8% growth forecast. Sterling trades at $1.3075 and €1.1905

Having climbed above $80, Brent Crude has seen some profit taking. After Microsoft struck a nuclear power deal with Constellation Energy last week, Google is in talks with utilities about nuclear power for its data centres.

Source: Bloomberg

Company News

Imperial Brands has this morning released trading update covering the financial year to 30 September 2024. The company is trading in line with expectations and is on track to deliver full-year results in line with guidance. The company has also announced an increase in shareholder returns – for FY2025, Imperial expects the return from dividends and share buybacks combined to amount to almost 14% of its current market capitalisation. In response, the shares are up 4% in early trading against a weak overall market backdrop.

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 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 these are attractive markets, especially Germany and the US which are more ‘affordable’ providing 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. An ERP roll-out will replace 60 legacy systems with a single platform over time. 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%.

As expected, performance in the financial year to September 2024 was weighted to the second half of the year, driven by the phasing of pricing in the prior year and reduced losses in NGP. The group has enjoyed an acceleration in tobacco and NGP net revenue growth versus last year and adjusted operating profit growth is close to the middle of its mid-single digit range.

Investment activities in the group’s five priority markets continue to deliver stable aggregate market share with gains in the US, Spain, and Australia, broadly offsetting declines in Germany and the UK. At the same time, the group has delivered strong pricing, while industry volume pressures have eased across the majority of its wider market footprint.

NGP net revenue is expected to grow in the range of 20-30% at constant currency, with increases across all three regions as the company builds scale in the existing footprint.

As expected, constant currency group adjusted operating profit growth improved in the second half of the year driven by strong results across all three regions. The performance also reflects reduced NGP operating losses and growth at Logista, the Spanish-based distribution business in which Imperial has a 50.01% stake. The group highlights that recent adverse currency movements have generated a 4% headwind to operating profit. Growth in adjusted EPS is accelerating faster as the reduced share count due to the ongoing share buyback is more than offsetting higher finance costs and a higher tax rate.

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. In the current financial year, adjusted operating cash conversion has been strong, and the group expects full-year leverage to remain at the lower end of its 2.0-2.5 range for adjusted net debt to EBITDA.

In line with its capital allocation policy and reflecting management’s confidence in the group’s strategy and cash generation, the company has committed to an ongoing, multi-year buyback programme that will deliver a material reduction in the capital base over time. The company believes this is preferable to buying back some of its expensive debt even though the cost of servicing that debt is rising.

In the financial year to 30 September 2024, the group bought back £1.1bn of shares and has today announced a further £1.25bn buyback, expected to complete no later than 29 October 2025. The company has also announced a total annual dividend of 153.43p for FY2024, an increase of 4.5% and in line with its progressive dividend policy. The company has also announced a plan to reprofile its ordinary dividend to four equal quarterly dividend payments, which will temporarily accelerate dividend cash payments of £270m in FY2025. The underlying dividend increase for FY2025 will be 4.5% to 160.32p. Taking dividends and the buyback together, Imperial expects underlying capital returns to shareholders in FY2025 will amount to almost 14% of its current market capitalisation.

Source: Bloomberg