Imperial Brands PLC (LON:IMB) said it would reduce its investment in vaping products for at least the coming year as it reported a decline in underlying earnings.

Adjusted earnings per share of 273.3p in the 12 months to 30 September were up 0.4% on last year, or down 1.6% on a constant-currency basis, having guided to flat at constant currencies in a pre-close trading update-cum-profit-warning in September.

READ: Imperial Brands shares burned over vaping warning

Tobacco net revenues rose 2.7% for the maker of Lambert & Butler and Gauloises cigarettes to £7.7bn as tobacco volumes fell 4.4% but net revenues from ‘next-generation products’, ie vaping, jumped 52% to £285mln.

“2019 has been a challenging year with results below our expectations due to tough trading in NGP,” said chief executive Alison Cooper, adding that the board was putting new actions in place to “drive a stronger performance in the coming year”.

She said vaping sales were below the expected level in part due to an “increasingly competitive environment and regulatory uncertainty in the USA”, with growth in Europe slower despite a market-leading share of retail in several markets. 

Reshaped and reprioritised 

Taking the “learnings” from the past year, investment in vaping has been “reduced and reprioritised” for 2020, with cash spent on markets and categories with the highest potential for sustainable, profitable growth. 

“We will scale up investment as the visibility on returns and regulatory uncertainties improves,” Cooper said.

The outlook was more cautious for 2020, with guidance for “low single digit” growth for revenue and earnings per share, with performance expected to be weighted to the second half.

A hike in the annual dividend to 206.58p represented the 11th 10% year in a row, with a new capital allocation and shareholder distributions policy now in place that is designed to grow the dividend progressively.

Future cash returns may be boosted by a sale of the Premium Cigar division, which Imperial has accounted for as a business held for disposal, with its value written down to £1.1bn, though Cooper said owing to low current tobacco valuations the group does not intend to pursue further asset disposals at this stage.

Also, on Tuesday, after around nine months of searching, Imperial announced that it has chosen JP Morgan veteran Thérèse Esperdy, currently the board’s senior independent director, as its new chair, succeeding Mark Williamson from 1 January next year.

Market reaction

After rising 1.5% in early trade, Imperial shares were flat at 1,738.4 by Tuesday afternoon.

Broker Liberum noted that the pre-close statement suggested net revenue would grow around 2%, it grew 2.2%, while EPS declined at constant currencies rather than the flat guidance.

“The company importantly announced a new chair and we see material progress towards the premium cigar sale,” Liberum said.

Credit Suisse said the new book value of the cigar business “would suggest disposal proceeds significantly ahead of our previous estimate of £600-700mln”, noting that on disposal, the £525mln asset impairment will be offset by anticipated cumulative foreign exchange gains of £300-400mln.

For Russ Mould at AJ Bell, “it is going to take a lot more than reassuring words to win back the market’s favour” and it “begs the question why this wasn’t the focus in the first place as that seems like the obvious business playbook”.

He said the more cautious outlook was a “marked difference between the usual messages from the tobacco company which has for years quietly got on with the job and churned out growth in earnings and dividends” and he noted Imperial used the word ‘resilient’ nine times in its full year results, “as if to try and convince the market that its business hasn’t fallen over as a result of recent problems”.

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