Morning Note: Market news and an update from Imperial Brands.
Market News
US equities finished lower last night, ending a bit off their worst levels – S&P 500 (-0.9%); Nasdaq (-0.8%). Both indices dropped below their 50-day moving averages. Big tech was mostly lower, with Nvidia falling ahead of its results tomorrow and Alphabet rising on the back of the Berkshire Hathaway interest. Healthcare was a notable gainer.
In Asia this morning, equity markets also declined: Nikkei 225 (-3.2%); Hang Seng (-1.9%); Shanghai Composite (-0.9%). Japanese government bond long-term yields jumped as lawmakers pushed for a large extra budget.
The Federal Reserve’s Christopher Waller backed a December rate cut as the jobs market nears “stall speed.” Notices of impending mass layoffs by US firms soared last month to among the highest levels on record, Cleveland Fed researchers said. Treasury yields firmed overnight, with the 10-year currently yielding 4.11%, while gold held above $4,000 an ounce.
The FTSE 100 is currently 1.0% lower at 9,582, while Sterling trades at $1.3160 and €1.1350. The Bank of England will increase the amount savers are guaranteed in the event of a financial institution failing from £85,000 to £120,000.
The European Commission stated that it now expects eurozone growth to moderate next year to 1.2% versus prior 1.4% forecast after raising 2025 GDP projection to 1.3% from 0.9% in its spring update. On inflation, the EC expects it to remain around the ECB’s 2% target for the next two years. German 10-year government bonds currently yield 2.7%.
Source: Bloomberg
Company News
Imperial Brands has released results for the financial year to 30 September 2025 were slightly above market expectations supported by higher tobacco prices and growing demand for smoking alternatives. Guidance for the current financial year has been released, with at least high-single-digit adjusted earnings growth expected. The shares have been a good medium-term performer and remain attractive given the level of prospective shareholder returns. In response to today’s update, they are up 2% against a weak market backdrop.
Imperial Brands manufactures and sells cigarettes, fine cut tobacco, smokeless tobacco, cigars, and next generation products. The main brands include Winston, Davidoff, L&B, West, Gauloises, JPS, Rizla, and blu.
Last March, the company unveiled its new 2030 strategy which builds on the strong foundations of the previous five-year plan which ran until September 2025. A distinctive challenger approach sees the company make deliberate, focused choices about which opportunities it pursues. The strategy has two focused objectives:
- Drive sustainable value in combustibles where the company will continue to focus on its five largest markets – the US, Germany, the UK, Australia, and Spain – which represent 70% of adjusted tobacco operating profit. Within these markets, Imperial has identified specific areas for further investment by category, brand, and sales channel. The objective is to continue to maintain aggregate market share across the five markets in aggregate, with the aim of driving sustainable growth and cash delivery. By applying this same performance-driven, consumer-led approach to the wider portfolio of smaller tobacco markets, Imperial expects them to make a greater contribution to overall performance over the next five years.
- Build scale in next generation products (NGP) – Imperial has a strong platform for a fast growing and agile NGP business with credible brands in all three categories (vaping, heated tobacco, and modern oral) and differentiated products available in all material markets where the group has distribution routes. Imperial will retain disciplined investment and market entry criteria as it builds a meaningful business with additional growth opportunities and strong profit and cash performance. For now, however, the business remains loss-making with no precise guidance on time to breakeven.
To support the delivery of its strategy, the company has identified further opportunities to create a simpler, leaner, and more agile organisation. These initiatives are expected to generate annualised savings of £320m by 2030, the majority of which will be reinvested to support growth. The anticipated cash cost of these initiatives is £600m, £500m of which will fall in FY2027 and FY2028. The company recently announced plans to cease production at its Langenhagen factory in Germany, either via a sale of the site to a third party or closure of the factory. Costs expected in relation to this process are within the group’s current guidance.
The new strategy will support the company’s medium-term guidance for growth on a constant currency basis: low-single digit tobacco net revenue growth and double-digit NGP net revenue growth; adjusted operating profit growth of around 3%-5%; adjusted EPS growth at a high-single digit rate, supported by a continued reduction in share count through the share buyback; and free cash flow generation of between £2.2bn and £3.0bn per annum.
At the start of October, Lukas Paravicini (ex CFO) became CEO following the retirement of Stefan Bomhard for personal reasons. The new CFO is Murray McGowan.
Back to today’s results. In the year to 30 September 2025, tobacco and NGP net revenue grew by 4.1% at constant current to £8.3bn, underpinned by double-digit NGP net revenue growth, strong tobacco pricing, and stable market share across five priority markets.
Tobacco net revenue grew by 3.7%, driven by strong price/mix (+5.4%). Volumes fell by 1.7% (to 186.9bn sticks equivalent), with the negative trend easing across the majority of the group’s footprint, although there has been some volatility in certain markets.
Aggregate market share was stable, albeit with widely varying performance. Market share gains in the Germany (+45 bps), Australia (+20 bps) were offset by flat share in the US (-1 bps) and declines in Spain (-45 bps) and the UK (-85 bps) where the group prioritised value creation over share . Since FY2020, the company has gained 48 bps of overall market share.
NGP net revenue grew by 13.7% at constant currency to £368m, at the top end of the 12%-14% range guidance. Performance was driven by oral nicotine in US and Europe, with share growth across all smoke-free categories.
Adjusted operating profit rose by 4.6% at constant currency to £3,988m. The performance reflects NGP operating losses reducing by 1.3% to £76m and a 0.9% gain at Logista, the Spanish-based distribution business in which Imperial has a 50.01% stake driven by strong tobacco pricing offset by long-distance transportation.
Adjusted EPS grew by 9.1% at constant currency to 315p, versus high single-digits expected. Growth was supported by the ongoing share buyback programme (see below), partly offset by higher adjusted finance and tax costs as well as increased minority interests, given strong growth in some of the group’s African markets.
The capital allocation framework includes investment in organic growth initiatives in combustibles and NGP, while continuing to evaluate opportunities for small bolt-on acquisitions, which will be focused on enhancing NGP capabilities. The capital intensity of the business is low with modest annual capex needs of £300m-£350m – last year it was £338m.
The 12-month free cash flow of £2.7bn reflected strong cash conversion of 97%. The company aims to maintain a strong and efficient balance sheet to support its investment grade credit rating with a leverage target at the lower end of 2.0-2.5 times net debt to EBITDA. During the latest year, adjusted net debt rose from £7.7bn to £8.4bn to leave financial gearing of 2.0x, in line with target. The all-in cost of debt modestly decreased from 4.2% to 4.3%. We also note that as part of a recent refinancing exercise, reflecting the performance and improved credit profile of the group, the lenders agreed to remove the leverage and interest cover financial covenants that were a condition of the previous facility.
The company has a progressive dividend policy to provide a reliable, consistent cash return to shareholders. Dividends per share will grow annually considering underlying business performance. The group has declared a dividend for FY2025 160.32p, up 4.5%. This is in line with the company’s previous commitment and equal to a yield of 5%.
Surplus capital is being returned to shareholders via an ‘evergreen’ (i.e. ongoing) share buyback over the five years to FY2030. The board will determine the quantum of future buybacks on an annual basis, in line with current practice, but has said they will be ‘material’. For FY25, the company bought back £1.25bn of stock, and for FY2026, a £1.45bn programme is expected to complete no later than 28 October 2026. Taking dividends and buyback together, the company expects its capital return to shareholders will exceed £2.7bn in FY2026, representing around 11% of the current market capitalisation.
The company has today provided guidance for the financial year to 30 September 2026 which is in line with its medium-term targets. On a constant currency basis, the group expects to deliver low-single-digit tobacco and double-digit NGP net revenue growth. Tobacco pricing will continue to more than offset cigarette volume declines. Adjusted operating profit is expected to grow in the 3% to 5% range, on a constant currency basis. In line with previous years, performance will be weighted to the second half of the year because of the phasing of combustible pricing and investment. After restructuring costs, free cash flow is expected to be at least £2.2bn in FY2026. Growth in operating profit combined with the impact of the ongoing share buyback is expected to result in at least high-single-digit adjusted EPS growth for the full year.
Source: Bloomberg
