Imperial Brands Prelims

[88V8]

I put OH quite heavily into IMPs in 2016, since when she's down about 50%.
Bought some myself a few months ago, and I don't doubt that they'll continue throwing off cash for many years, but atm the way ahead for the Tobaccos is less than clear.

Is this Strategic ignorance or Tactical ignorance, dunno, I'm ignorant about which sort of ignorance this is, but not inclined to add just now, what with our current BATS holding n'all.

V8

[PinkDalek]

The ex div date whether on one day or another, does it really matter?

Important enough for them to issue a corrective RNS:

Imperial Brands PLC - IMB
Further re (Final Results)
Released 13:17 05-Nov-2019
Interim dividend- ex-dividend date correction
https://www.investegate.co.uk/imperial- ... 17583488S/

[Dod101]

The ex div date whether on one day or another, does it really matter?

Important enough for them to issue a corrective RNS:

Imperial Brands PLC - IMB
Further re (Final Results)
Released 13:17 05-Nov-2019
Interim dividend- ex-dividend date correction
https://www.investegate.co.uk/imperial- ... 17583488S/

Thanks but I must say I never look at that. We have had the discussion before but buying before or after an ex div date makes little difference overall.

Dod

[simoan]

I’ve had a look this morning at Imperial Brands as a speculative punt, but decided against it.

When I come across a company with such a huge yield compared to the market, the first thing I recommend is to have a look at its traded debt; preferably its longest dated quoted bonds. Imperial 4.875% 2032 bonds currently trade at £119.15 per £100, which corresponds to a redemption yield of roughly 3.05%. So the market isn’t signalling that solvency is a concern.

For me the big negative in the accounts is the massive discrepancy between statutory earnings per share (106.0p) and adjusted earnings per share (273.3p). The company has done what lots of companies do to generate an adjusted eps; ignore certain items which are either one-offs or are unrepresentative. This produces the “underlying” earnings, what the business earns once the one-offs are removed.

Note 8 of the accounts in today’s RNS (link below) details the difference between the earnings per share, much of which comes from amortisation and restructuring charges. For some companies it is debatable whether amortisation charges (depreciation of intangibles) should apply due to the strength of their intangible assets (e.g. The Coca-Cola brand). I’d argue that tobacco is most definitely not in this category due to changing consumer habits and the political and social climate.

https://www.investegate.co.uk/imperial- ... 01122771S/

The restructuring charges seem to occur every year. I’d argue that these are operational costs. Those of us who’ve read Terry Smith’s “Accounting For Growth” might remember Rank Hovis Macdougall’s extraordinary closure costs had occurred in each of the past eight years, averaging at 22% of reported profits (see page 54 of the Second Edition). Some of the pharmaceutical companies have been doing something very similar with their “core earnings” which disregard what looks to me like recurring costs.

Imperial Brands’ adjusted earnings price earnings ratio is just 6.3 but if we use the statutory earnings the P/E ratio jumps to 16.4, whilst the dividend is only 51% covered by statutory earnings per share.

IMHO this isn’t quite the bargain that it appears to be at first glance.

Very interesting post and you make a very good point to look at bond prices to determine what the market really thinks about a company's debt levels, solvency etc. It's something I used to do but had kind of forgotten since I mainly look at small and mid caps these days where this litmus test is mostly not possible.

Whilst I agree about the use of adjustments to earnings that recur year to year, this is much more of a concern when a company is not generating any free cashflow IMO. You can boost EPS through adjustments but you can't fake cash... unless you're Patisserie Valerie , that is! And of course, Terry Smith did hold IMB until a year or two ago, so must have been relatively happy with this accounting treatment himself.

All other things aside, IMB is a brilliant cash generating machine with impressive conversion of earnings to cash, so I'd rather concentrate on P/FCF than P/E. A quick look at the results shows that P/FCF for FY 2019 is about 11 giving a FCF yield of 9%. I'd call that cheap by anyone's metric.

All the best, Si

[moorfield]

Swallowed my principles today and bought my first ever tranche. It just seems to good to not dip a toe in.

So your greed has trumped your ethics? Oh dear.

I wouldn't worry. It's the human condition.

[Dod101]

Hi Snorvey, I am glad to see the OldFool agreeing with me. OTOH it is always useful to have a view from another angle like SalvorHardin's.

Dod

[Arborbridge]

And of course, Terry Smith did hold IMB until a year or two ago, so must have been relatively happy with this accounting treatment himself.

Until a year or two ago. Perhaps he changed his mind?

Anyhow, I think the disparity between the different types of eps are worrying in any company, especially when the difference is this large. At least, it's a red flag which tells me there's some huge fiddle factoring going on which I will never be able to understand.

Arb.

[Arborbridge]

Some thoughts about IMB over on OldFool......

https://www.fool.co.uk/investing/2019/1 ... aming-buy/

Thanks for that link. At least I now know what this "NGP" means that I see bandied around (I probably did know, but my memory ain't what it used to be!)

Arb.

[simoan]

And of course, Terry Smith did hold IMB until a year or two ago, so must have been relatively happy with this accounting treatment himself.

Until a year or two ago. Perhaps he changed his mind?
Arb.

IIRC he sold IMB because he lost faith in the management and their strategy. I don't believe it was due to the economics of the business.

All the best, Si

[Dod101]

Hi Arb

The difference in the EPS is not a 'fiddle factor'; it is all explained in the accounts.

Salvorhardin's point is of course perfectly valid but when it becomes a habit, we all know about it. I think though that in this type of business, big moat, pretty well guaranteed market, negligible advertising and promotion costs, cash generation is king. On that basis, the tobaccos in general win every time. Whether they can find a similar market in NGPs is open to doubt but meanwhile, cash continues to cascade out of their coffers, and some at least ends up in shareholders' pockets. That is all that I need, especially with an investment which has cost me less than nothing.

I discovered today that the same 'cost me nothing' applies to my holding in Unilever, after my recent top slicing, and it remains my biggest holding.

Time in the market and avoiding real disasters is all that is required for a quiet investing life.

Dod

[monabri]

And of course, Terry Smith did hold IMB until a year or two ago, so must have been relatively happy with this accounting treatment himself.

Until a year or two ago. Perhaps he changed his mind?
Arb.

IIRC he sold IMB because he lost faith in the management and their strategy. I don't believe it was due to the economics of the business.

All the best, Si

https://www.fundsmith.co.uk/analysis (...........2017)


"Imperial Brands is the former Imperial Tobacco that we had held since the inception of
the Fund. We had become increasingly concerned about the company’s positioning in
terms of its lack of exposure to the developing world and to the next generation
reduced risk products such as heat not burn devices, all of which has led to volumes
falling at a rate that it is difficult to cope with. We were even more concerned by the
management reaction which we literally could not understand."


Well, Cooper has stepped down and NGPs are currently ( currently) "under review"... I wonder if Mr Smith will have a change of mind ?

[JoyofBricks8]

Another reminder that Terry Smith is a far more canny investor than me: I was aware of his sale, but elected to continue to hold as I felt that the business was likely to remain profitable. The management gobbledegook I was prepared to overlook.

While the business has remained profitable, it is cold comfort: had I placed my IMB money into my Fundsmith pot I would be considerably better off. He was a lot more right than me. And still the torrent of gobbledegook continues.

Now we have IMB opting for a chairman with no tobacco industry experience, but an obvious gender attribute that is currently fashionable. I doubt this is quite “get woke go broke” territory yet, given Therese Esperdy is an expert in bond markets, and an investment banking heavyweight but I am not particularly impressed and would prefer someone with more tobacco time served.

I am also scratching my head that IMB would want to ditch the cigars business, given that this seems to be one product that appeals to the luxe market and somewhat relatively immune to millennial anti-tobacco health sentiment. I know paying down debt is urgent but cigars have something indefineable and plutocratic that will see them survive long after the fad for cigarettes fades. Clinton and Lewinsky didn’t get up to cigarette based mischief. The cigar was favoured and will remain favoured for deep seated psychological reasons.

On balance, I think this is a good time for me to take my medicine and cut my losses. IMB is not going anywhere positive soon, and there are more promising places to deploy my painfully shrunken capital. There are only two possible outers of value here: cannabis or a takeover. The debt pile is something of an obstacle to takeover, and I don’t want to gamble my capital on cannabis, which will doubtless face legal challenge for triggering psychosis mental issues from customers in future.

[Arborbridge]

The difference in the EPS is not a 'fiddle factor'; it is all explained in the accounts.



Time in the market and avoiding real disasters is all that is required for a quiet investing life.

Dod

When the difference becomes enormous and habitual, then I think it's a fiddle factor - a lever the management can pull to make themselves look better. It can include repeated items one might as well be honest about and call them operating costs. It would make everyone's life easier, but obfuscation is just what management wants. I'm not disputing the cash flow.

As for time in the market: that is the easy part - the second part of your requirement isn't

Cheers,

Arb.

[Dod101]

Another reminder that Terry Smith is a far more canny investor than me: I was aware of his sale, but elected to continue to hold as I felt that the business was likely to remain profitable. The management gobbledegook I was prepared to overlook.

While the business has remained profitable, it is cold comfort: had I placed my IMB money into my Fundsmith pot I would be considerably better off. He was a lot more right than me. And still the torrent of gobbledegook continues.

Now we have IMB opting for a chairman with no tobacco industry experience, but an obvious gender attribute that is currently fashionable. I doubt this is quite “get woke go broke” territory yet, given Therese Esperdy is an expert in bond markets, and an investment banking heavyweight but I am not particularly impressed and would prefer someone with more tobacco time served.

I am also scratching my head that IMB would want to ditch the cigars business, given that this seems to be one product that appeals to the luxe market and somewhat relatively immune to millennial anti-tobacco health sentiment. I know paying down debt is urgent but cigars have something indefineable and plutocratic that will see them survive long after the fad for cigarettes fades. Clinton and Lewinsky didn’t get up to cigarette based mischief. The cigar was favoured and will remain favoured for deep seated psychological reasons.

On balance, I think this is a good time for me to take my medicine and cut my losses. IMB is not going anywhere positive soon, and there are more promising places to deploy my painfully shrunken capital. There are only two possible outers of value here: cannabis or a takeover. The debt pile is something of an obstacle to takeover, and I don’t want to gamble my capital on cannabis, which will doubtless face legal challenge for triggering psychosis mental issues from customers in future.

The NGP problem/disappointment is not confined to Imperial; all the tobacco companies have found it not quite as straightforward as they had hoped. Obviously choice of chairman is, but the new Chairman has been on the Board of Imperial for some years and actually I tend to think that a person who is not a time served tobacco specialist is probably a good thing. They can judge the situation from an unblinkered point of view. The Chairman is not the CEO but is expected to ask difficult questions of the CEO and the executive team. The chairman and the Board must be as aware as we are of the share price, and hopefully will take steps to try to improve it.

As for selling the cigars business, I cannot attempt to try to second guess the company, and have no opinion on its sale. That is why we have a Board of Directors. Incidentally I note that they have something of a Marston problem in that they appear to have had to accept a price less than their carrying value and so take an impairment charge, which, in their case, they tell us is likely to be at least partially offset by a big foreign exchange gain.

Dod

[simoan]

The Chairman is not the CEO but is expected to ask difficult questions of the CEO and the executive team. The chairman and the Board must be as aware as we are of the share price, and hopefully will take steps to try to improve it.
Dod

IMHO the board of a company should never consider the share price, let alone mention it in public. If they run the business properly and deploy capital effectively, the share price will take care of itself. If I hear a company management mention the share price I run for the hills. Invariably their only concern with share price is normally with regard to the over-generous share incentive packages they award themselves. They have various names for these things (my favourite is "Value Creation Plan") but it is theft from other shareholders by any other name.

All the best, Si

[Dod101]

The Chairman is not the CEO but is expected to ask difficult questions of the CEO and the executive team. The chairman and the Board must be as aware as we are of the share price, and hopefully will take steps to try to improve it.
Dod

IMHO the board of a company should never consider the share price, let alone mention it in public. If they run the business properly and deploy capital effectively, the share price will take care of itself. If I hear a company management mention the share price I run for the hills. Invariably their only concern with share price is normally with regard to the over-generous share incentive packages they award themselves. They have various names for these things (my favourite is "Value Creation Plan") but it is theft from other shareholders by any other name.

I think they would be negligent not to consider the share price as that reflects the public perception of the company and of its value. It is also very relevant for rights issues and possible takeovers so of course they need to consider it. There is not much they can do about it in the short term(except maybe launch a share buyback programme) but they sure need to be aware of it.

In relation to Imperial I would expect them to sharpen up the performance, and take a more realistic view of so called NGPs which they have already said they will be doing.

Dod

[Gengulphus]

At least I now know what this "NGP" means that I see bandied around (I probably did know, but my memory ain't what it used to be!)

Hardly surprising, given that The Niche Group was delisted from AIM over 7 years ago! Practical tip of the day: Investegate is a very handy source for when one has forgotten which company an EPIC refers to... ;-)

Gengulphus

[TUK020]

Various sources are reporting that scientists have identified the cause of the recent vaping illnesses & deaths as vitamin E acetate which apparently, is perfectly safe for humans - unless it is drawn into the lungs.

Sounds distinctly unpleasant, but whatever floats your boat I guess. At least now the fag companies can work on removing/finding a replacement the vitamin e acetate, which can only be Good news.

Vitamin E acetate wasn't used by the fag companies, and wasn't used for nicotine.
It was used in unofficial vaping liquids as a bulking agent for cannabis oil.

[PinkDalek]

The ex div date whether on one day or another, does it really matter?

Important enough for them to issue a corrective RNS:

Imperial Brands PLC - IMB
Further re (Final Results)
Released 13:17 05-Nov-2019
Interim dividend- ex-dividend date correction
https://www.investegate.co.uk/imperial- ... 17583488S/

So important that they've announced another correction, having realised they should have issued one about the Final as well:

Final dividend- ex-dividend date correction
https://www.investegate.co.uk/imperial-brands-plc--imb-/rns/further-re--final-results-/201911181248047727T/



Yes, I saw your later comment re We have had the discussion before but buying before or after an ex div date makes little difference overall but getting published ex-dividend dates correct are not only re buying. As I know you know.