Is Imperial Brands’ share price set to soar on an upbeat H1 trading update?

Imperial Brands’ share price looks very undervalued against its peers but may be boosted by a positive H1 trading update released today.

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Imperial Brands’ (LSE: IMB) Tuesday (9 April) trading statement may kick start its share price recovery, in my view. The stock has lost around 14% of its value from its 26 April 12-month high, as I write.

This fall is in large part due to the broad decline in smoking globally. So the company, like all its major peers, is looking to gradually shift its business into nicotine replacement products.

Positive trading forecasts?

The trading update highlighted that H1 adjusted profit this year will be higher than in H1 last year. This is due to higher profits in its tobacco and ‘Next Generation Product’ (NGP) nicotine substitute goods. 

The company’s also confident it will achieve its full-year revenue and profit expectations. These are low-single-digit net revenue growth for nicotine and NGP and mid-single-digit growth in its adjusted operating profit.

Also positive is that it’s remaining on track to deliver a £1.1bn buyback programme by 29 October. Buybacks tend to be broadly supportive of share price gains.

Strong core business?

Imperial Brands’ success so far in transitioning from tobacco to nicotine substitute products was also evident in 2023’s results.

Operating profit increased 26.8% over the previous year — to £3.4bn. Earnings per share also increased sharply — by 52.1% to 252.4p. Its nicotine replacement goods saw net revenue up 26% compared to 2022.

A risk in the stock is that this transition falters, allowing its competitors to gain market share at its expense. Another risk remains future legal action for health problems caused by its products in the past.

That said, analysts’ forecasts now are for earnings per share to grow by 5.2% a year to the end of 2026. Return on equity is projected to be 53% by that time.

Big dividend payer

Also supportive of stock gains over the long term are the big dividends paid, in my view.

The 2023 payout is 146.82p a share, which on the current price gives a yield of around 8.5%. This makes it one of the few firms that gives investors an 8%+ return, against the FTSE 100 average of 3.8%.

£10,000 invested now at an average yield of 8.5% would create a total investment pot of £23,327 after 10 years. This would pay me £1,894 in passive income each year, or £158 a month.

After 30 years, provided the yield averaged the same, I would have a £126,925 investment pot, paying me £10,308 a year, or £859 every month!

Undervalued against its peers?

Whether Imperial Brands’ share price will soar remains to be seen. But it certainly looks very undervalued against its peers.

On the key price-to-earnings (P/E) stock valuation measurement, Imperial Brands trades at just 6.4. This compares to a peer group average of 14, so it looks very cheap on that basis.

How cheap? A discounted cash flow analysis shows the stock to be around 64% undervalued at £17.27 as it is at the moment.

Therefore, a fair value would be around £47.97, although this does not necessarily mean it will ever reach that level.

This is one of the reasons I already hold the stock, with its high yield and strong business being the others. And if I didn’t already own the shares, I’d buy them right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Imperial Brands Plc. The Motley Fool UK has recommended Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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