Can vapes save Imperial Brands?
Twenty years ago, tobacco companies were among the top performers on the London Stock Exchange, driven by consistent cigarette demand and aggressive global expansion.
But the attitude towards smoking has since shifted, with the numbers of smokers in the UK dropping off the back of campaigns, the rise of vaping and public health policies.
In 2024, the amount of UK smokers dropped to roughly 10.6 per cent, down from around 20 per cent two decades ago.
While those who have stopped smoking are reaping the health benefits, tobacco companies are feeling the heat, with both Imperial Brands and British American Tobacco under pressure to adapt to new product segments.
Imperial Brand’s share price crashed, dropping 8.6 per cent in early trading following its latest update, to 2,916.5 pence, with shares down 9.4 per cent this year to date after mild revenue growth.
But analysts remain bullish on Imperial Brand’s future despite its latest lacklustre trading update, as the company looks to new ground to ensure long term growth.
Tobacco prices and alternatives
The group expects low single-digit revenue growth in the first half of the financial year with rising tobacco prices being a key driver for ensuring growth.
The UK underwent a major hike last year, increasing tobacco prices by two per cent above the retail price index (RPI).
Hand-rolled tobacco faced a steeper increase, with duties rising to 12 per cent above RPI inflation.
Price hikes ultimately offset combustible product volume declines, while the growing popularity of next generation products (NGPs), such as vapes, heated tobacco and nicotine pouches, is also expected to boost revenue.
The group expects NGPs to deliver double-digit net revenue growth in the first half of the year, with analysts viewing the products as critical to keeping investors interested in the company.
Richard Hunter, head of markets at Interactive Investor, said: “Changing lifestyle habits and tougher regulation perennially overhang this sector, but in the meantime Imperial Brands continues to play the cards it has been dealt carefully.
“Quite apart from the shifting landscape and the burden of regulatory censure which has plagued the sector over recent years, there is also a reluctance among some investors to invest in tobacco companies at all on ethical grounds.
“As such, the tobacco companies are racing towards Next Generation Products (NGP) as an alternative.”
The Bristol-based company also completed £0.7bn of its £1.45bn share buyback plan.
Be patient
The group expects to continue scaling its NGP products, anticipating double-digit growth in both Europe and Africa and Asia, off the back of growing momentum of heated tobacco, particularly in Italy and Greece, and new product launches.
But shareholders were not won over by the expansion, as investing took priority over long term growth, leading analysts to call for patience.
March Crouch, market analyst at Etoro, said: “While next-generation products are edging forward, the likes of blu and Pulze are building presence, albeit with investment still dampening near-term returns.
“With £2.2 billion in sight and buybacks continuing, investors are being paid to wait, a rare comfort when markets feel anything but settled.
“Delivery in NGP remains key. The transformation… is promising, but proof will be in the execution.”
Axel Rudolph, chief technical analyst at IG noted that while the transformation plan “appears to be gaining traction, much of the heavy lifting is still to come”.
Others noted that the company must lure over investors who deem the company unethical in order to maintain its scale.
Deren Nathan, head of equity research at Hargreaves Lansdown, said: “Imperial’s ability to sustain modest growth and impressive cash generation over the long term will depend on its rollout of NGPs, and here execution looks to be improving as it focuses on its strongest markets.
“The theme of doing less things, but better, extends to tobacco too, where the group concedes it’s lost some market share in its top markets while growing profit.
“But…Imperial must now compete with companies from less controversial industries for the attention of income investors.”