Cube Report (17th Nov 2020) – Tesla graduates to the big league

Cube Report (17th Nov 2020) – Tesla graduates to the big league

Good afternoon!

I’ll talk to the camera again today, at 2pm.

Interested in Tesla and some UK share news. Here’s the location:

Imperial Brands

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Market cap £14.2 billion
RNS Final Results
Writer disclosure Long BATS.

The market loved these results.

As an investor in rival BAT, another cheap tobacco share, I’m pleased to see it!

The value-growth dichotomy has never been wider than it is now. And so you can get IMB at a P/E ratio of around 6x (before adjustments, at least).

Note that EPS is forecast to grow next year and the year after that. Only at a modest rate (3.5% each year), but even if it stays still – doesn’t that valuation sound quite exciting?

Net debt needs to be considered. It’s now £11.1 billion on a reported basis.

The company provides a lower version, “adjusted net debt”, but the only one of these adjustments which I personally would make is the lease liabilities. So for me, “real” net debt is around £10.8 billion:

Last month, Imperial sold its Imperial Cigar division for €1.225 billion (£1.1 billion), of which around £1 billion will be used to pay down debt.

The dividend has also been rebased at a lower level (reduced by a third).

The goal of these actions is to bring adjusted net debt/EBITDA to the lower end of 2-2.5x by the end of 2022. I’m not sure how likely this is, but I do expect plenty of progress in this regard.

As of February, Imperial had a Baa3 rating from Moody’s. That’s only one level above junk.

The rating agency summarised their view as follows:

Moody’s highlighted the high profitability of Imperial Brands’ operations and its stable cash flow generation. The agency said that despite declining volumes and sluggish revenue growth, the company’s traditional tobacco business remains very profitable. Imperial Brands reported operating margins of about 44% in fiscal 2019.

Moody’s said Imperial Brands’ rating is constrained by the lack of progress in the development of vaping and heated tobacco products. The agency said developing this line of business is essential for the company to be able to continue to compete in an increasingly regulated sector.

Next Gen Failure

One of the big problems with IMB has been its failure in “next generation products” (NGP) – the alternatives to traditional cigarettes which offer the hope of healthier alternatives. The vaping and heated tobacco products referred to by Moody’s.

In addition to potentially being better for the consumer, this category excites investors in the space because a) it might grow volumes, unlike the traditional cigarette business, and b) it might be treated better by regulators.

Unfortunately, a) and b) haven’t been working out particularly well.

Imperial reports full-year net revenue from NGP down by a whopping 27%, although H2 did perform much better than H1 (minus 9% vs. minus 43%). A “moderated loss” is expected to continue in 2020.

Overall, adjusted EPS falls 5.6%, “reflecting reduced tobacco profit with COVID-19 and regulatory costs; and losses in NGP“. Remember that smoking was banned during the Covid crisis in Spain and South Africa.

My view

There’s a lot to unpack here.

In addition to the great imponderables of future regulatory action and shrinking volumes in the traditional business, you have some material adjusting items to be aware of:

Don’t get me wrong: I am interested. I would like my portfolio to offer a little more yield, and IMB could be the place for me to get it. But I will need to reflect on it some more.

That will do it for now.

See you tomorrow, probably broadcasting at 12pm!




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  • comment-avatar

    I salute your transparency on Tesla and on your other stocks that have suffered covid . Its been a “black swan” year like no other . One where “choose and hold” suffered against a cash out and re buy strategy . Cripes there have been some bargains to be had amoungst what one would have called blue chips . I slimmed out my AIM trades a fair bit and went back in the FTSE upper regions with some hold trades for the future . Some nice gains already ( unless we have another big correction of course ! )

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