Imperial Tobacco's (IMT) preliminary full-year results for the fiscal year ending September 30 2014 were almost exactly in line with our forecasts. The firm held its own against its larger competitors in the global tobacco industry, lending support to our wide economic moat rating. As there were few surprises in the earnings report, and with an unchanged short and long-term outlook, we do not expect to make material changes to our £26.50 fair value estimate.
After adjusting for some non-recurring items, including trade inventory adjustments and Master Settlement Agreement credits, underlying net revenue grew by around 2% in the fiscal year. This is in line with the nine month results recently reported by Philip Morris International (PM) and British American Tobacco, demonstrating that Imperial is executing on its strategies in both Returns and Growth Markets.
Volume contraction of 4% was softer than that reported by its larger competitors on a year-to-date basis, but the underlying volume increase of 7% in its Growth Brands portfolio was slightly better than the 6% growth reported by British American (BAT) for its focus brands.
On profitability, too, Imperial continues to punch its weight. The logistics business, partially spun off earlier this year but still consolidated in the results, weighs on Imperial's margins and returns on capital, but its tobacco business is actually relatively high-margin. With a reported EBIT margin of 43.3%, the firm's tobacco business is slightly more profitable than its larger competitors, thanks to its presence at the high end of the price spectrum.
We like Imperial's bar bell product portfolio. Its premium brands should drive long-term growth in markets such as Eastern Europe as economic conditions improve, while its discount brands should capture volume share in mature markets. Management identified Australia as one of its strongest Returns Markets this year, as trading down there continues to be a tailwind for economy brands.
