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Imperial Tobacco Company Plc is the world's fourth largest tobacco company in the world with a market share of over 5%. The UK market share for 2010 was 45%. The group primarily operates in Europe, Africa, Middle East and Asian regions. It has a presence in over 160 countries worldwide, operates 51 manufacturing sites and has around 38,000 employees.
Past, Present and Future.
In 2014, the global tobacco market forecast is to have a value of $490.2 billion, an increase of 14.2%. Cigarette is the largest segment of the global tobacco market, accounting for 91.8% of the market's total Value1. Analyst Don Hedley suggests that volume trends are a fairer way to calculate prevalence. Looking at a CAGR from 2009-2040, based on historical trends, Japan's tobacco market would be 80% smaller in 2040, and the USA, Brazil and the UK would be 30% smaller 2. Given this scenario and the fact that IMT PLC has begun on the growth track in 2010 and it still has time to make the most of the global market. The major global competitors for IMT PLC are Philip Morris International, China National Tobacco Co. and Japan tobacco Inc 1. Other than mentioned previously, in the UK major competitors are Altria group Inc, British American Tobacco Plc and Reynolds American Inc 1. Throughout the review Imperial Tobacco PLC would be written as 'IMT PLC'. It can be categorized within Consumer goods in the tobacco industry. Imperial reports its business under two operating segments: tobacco and logistics. Despite intense competition, crisis times and unfavourable attitudes towards tobacco consumption, IMT PLC's performance has been positively growing in the past years. Currently IMT PLC is faced with restructuring and strategies to cope with legal regulations since 2007. It is arguably obvious that governments across the globe derive highest amount of tax benefit from manufacturing and sale of tobacco and tobacco equivalents; however for a tobacco company maneuvering its way around these regulations and sustaining itself optimally is getting difficult. The company's transforming year was 2008. The company acquired Altadis and Logista with an estimated operational efficiency of around â‚¬300 million. Today IMT PLC's performance is on the rise with competitors on most parameters. The overall performance of the company was positively affected by the growing business in Spain, repayment of their short term liabilities by refinancing and increased sales volume for three brands. The need to change the dividend policy and provide higher (return on investments) ROI was a strategic decision that IMT PLC lived up to this year and plans to for the next few years. The credit rating still with all these changes and huge leverage conditions has still been positively high. The company performance has had a positive impact on the overall Shareholder value analysis by increasing its operating profits and huge achievements were Debt clearance, Acquisitions, emerging markets and planned price rise for 2011. A detailed SWOT Analysis is attached in the Appendices 1. The conclusion section gives a fair evaluation in brief about future shareholder options. All figures have been extracted only from these sources: Company Annual reports - Income statement, Balance Sheet, Cash flow statement and mainly 'Notes to the financial statements', Reuters.com and Forbes.com
Despite the totoal tobacco market shrinkage, profit margins have increased owing to increase in sales of Davidoff, West and Gauloises Blondes which reflected sales growth of 8.7% from Spain. The negative growth in white stick equivalents and cigarettes was compensated by the growth in Fine cut tobacco.
The actual capital employed in the business has been and will be reducing. The business sold, depreciated and amortised several assets. Also the current liabilities (borrowings) had significantly reduced from 2560 million last year to 329 million this year 6. The decrease in non-current assets in 2010 is because of the adjustment of reduced goodwill from 'Reemtsma acquisition' 4 worth 41 million and increase in inventories and foreign gains worth 210 million under current assets. With so much asset reduction ROCE improved since last 2 years.
ROSC Industry average 2010 8
ROSC Sector Average 20108
12.16 (as of 14th April 2011)
5.82 (as of 14th April 2011)
The Equity amounts for 2009 was lower since the organisation's operations were not able to repay all the liabilities. Hence the organisation paid up equity from 'retained earnings'. The ROSC in 2010 tripled as the net profit grew more than half from 2009. The huge leap on shareholder payment was the main priority after in 2009 hence the company chased profitability to achieve this. Also since the group saved on finance costs the resulting PBIT was high increasing the ROSC.
ROA Industry average 2010 8
ROA Sector Average 20108
0.95 (as of 14th April 2011)
1.62 (as of 14th April 2011)
The total return on Assets was owing to increased operating profits in 2010 and disposal of many assets from the Altadis synergies. As stated earlier, figure in 2010 would be higher than industry and sector averages, owing to reducing assets and increased operating profit. Also many restructuring costs borne today from the European acquisitions will yield result 3-5 years from now; hence this ratio will be expected to improve.
The debt position has had a 16% improvement since last year, however IMT PLC plans to keep up on higher net incomes to balance equity proportions. Debt to Equity also shows that for the
past three years the risk component of the business has decreased by looking at Equity over long and short term borrowings and overdrafts; the company is uses very high leverage but does have financial risk mitigation initiatives like a group treasury committee to warn them of any debt triggers. Debt position overall needs to reduce for the risk factor associated. This would mean inviting shareholder contributions which in turn means aiming for profitability in the next coming years aggressively.
Interest Cover Industry average 2010 8
Interest Cover Sector Average 20108
0.58 (as of 14th April 2011)
0.59 (as of 14th April 2011)
The company has been gradually increasing its capacity to meet interest obligations from its operational earnings; especially in 2010 as the operating income was fairly high. The company's strategies of sales growth, cost and efficiency and cash utilisation must be maintained at least through the next 2-3 years to maintain the same levels of operating profit as 2010 for risk aversions and credit rating improvement on subsidiaries from other countries. The company has huge revolving refinance facility at floating interest rates for non current borrowings. Any significant increase in the borrowed interest rates may eat into operating earnings. Moreover the company has undertakings worth 3976 million which is unsecure and can be paid back on demand.
In 2008 the profit for the year was low and the taxation rate was high as were the finance costs. The trade receivables were lower than trade payables. All this had to be managed from operating cash flow. In 2010 the profit was significantly high; however movement of cash in to working capital and provisions and increase in trade payables affected cash flow. In 2009 even though the profits were low, income from investments were very high and the movement in provision was very low. The group also has £231 million of total cash and cash equivalents held in countries in which prior approval is required to transfer the funds abroad. The overall cash position is secure.
Industry average 2010 8
Sector Average 20108
0.44 (as of 14th April 2011)
0.87 (as of 14th April 2011)
0.25 (as of 14th April 2011)
0.63 (as of 14th April 2011)
There has been an increase in the ratio between current assets and current liabilities. This is a good indicator of the company being able to pay off liabilities from the cash it generates off of its current assets. However as per the quick ratio, the company is relatively low on this ratio. It needs to able to funds for its short term liabilities in a much bigger proportion owing to its size and nature of business- Consumer which is usually fast moving. If stocks are removed then the company has relatively very few assets that can help sustain its liabilities. If in the future if bans minimise current assets and therefore current liabilities, production would be affected and so would sales. The total assets also include several acquisition assets, the sale of which would be accounted for in the next financial statement. This figure is also expected to improve.
Current Ratio Quick Ratio
Shareholder liquidity has remained consistent over the years. Despite unfavourable operating profit conditions in last few years the company has managed to keep the shareholders' interest secure in the company. Satiating Shareholder liquidity is the right decision as it is extremely important for future survival since all the mergers, acquisitions made by the company would take at least 3-5 years in effect to show results.
The average number of days that the company takes to repay its debtors has been reducing since 2008. This is because the organisation has been making increasing payments debtors year on year and the deferred income amount has been increasing consistently.
Trading and sales have picked up and apt amount of investments have been made in maintaining optimum level of inventories or stock. The average number of days that stock sits in warehouses before it is sold has reduced 2008. More finished goods were made available for sale suiting demand rise. The stock turn over period could increase further more if the group can make use of all its assets and enter emerging markets.
The noticeable consistency between Stock turnover and creditor's turnover suggests that creditors are being paid even before or almost immediately after cash generation. The payment amount has been fairly consistent last year and in 2010. The company has maintained healthy supplier relations and is improving on the same.
Optimum Assets have been put to produce the current ROCE and working capital has been reducedby 1.7% from last year. The company has been able to clear a high debt owing to which the cash cycle has improved.
In 2008 and 2009 the dividend payouts were significantly lower as even equity was being paid from retained earnings and there was practically not much left for dividend payouts. In 2010 however the strategic focus was on shareholder satisfaction and arguably the dividend payout was given on time to possibly retain share prices in the future and also to maintain credibility from an investor's perspective. There has been almost a 50% percentage change in Dividend payment from last year to 2010.
With respect to competitors, global and domestic the investor confidence in the future growth of IMT PLC today is relatively much lower than competitors and industry average. It definitely though does not indicate any insecurity for investors. The company is in the midst of settling down and emerging from acquisitions made since 2008 and it has been growing in every way marginally every year. These share price figures were extracted from Reuters, and Forbes (2011) as on 12th April 2011.
The dividend yield has been calculated based on the year end date 30th September for the past three years. The yield is high in 2010 owing to high dividend payouts since investor confidence is required to boost market capital and shareholder support.
Without any profit retentions or movement to provisions, if the company pays off everything that it earned to shareholders as dividends each shareholder as of 2010 still expect to gain 8.13 of dividend yield. This obviously is high in 2010 owing to high dividend payouts that affected the current expected share value from investors.
Growth & Sustainability: The production volumes for the company have been increasing since 2008. The total volumes of sales last year was 697 million units. Observing past trends the variables costs for IMT PLC needs to increase margins. Achieving growth in the future with regards to cost savings means avoiding opportunity costs, impairment costs. On profitability & Liquidity -maintaining an optimum balance on debt levels, dividend payouts, equity and retained earnings. Assuming an overall growth rate of 8% for 2011 (2010 -6%) on total revenue the company must make approx £ 30,426 million revenue next year as against 28173 in 2010. 8% growth with the plan to increase product prices ensures nout just profitability but a secure cash and debt repaying position. More so operating profits need to grow from value generated (hard factors) not just by savings (soft factors). Considering that the selling price per tobacco unit (especially cigarettes) is £ 7.5, there is not enough room for passing the variable cost to the price. Hence the company should arguably opt for volume sales and tap as much emerging market as possible in these next few years.
Corporate governance initiatives: Business in the Community's 2009 Corporate Responsibility Index awarded IMT PLC a Gold rating with an improved score of 93.8%. The organisation structure is relatively highly centralised owing to the nature of business. The business has a methodology of appointing a neutral team known as the 'Group Treasury Committee' that takes care of all the financial risks in the best interest of employees and shareholders. Many other risks such as Litigations, Competition, Market dependency, illicit trade and regulations etc have structured mitigation plans in place. The group also involved in community spending worth £ 3.7 million in 2010.
Global market share: IMT PLC's production strategy includes both volumes (54%) and differentiation (46%). It caters both to customers who demand value and customers who are brand conscious. Major opportunities for the organisation are to firstly increase profitability and brand in and from emerging countries with a view to increase overall market share. Today IMT PLC a just above 5% on global market share, it has ample growth opportunities. IMT PLC may appear global in terms of their how many countries they operate in; however a truly global organisation is also measured in terms of assets placed, employees hired and revenues generated internationally. Philip Morris, China National Tobacco and Japan Tobacco Inc lead the global market share with 17.4%, 13.8% and 13.3% respectively. IMT PLC has touched today with Japan Tobacco. The reasons on why countries such as Colombia, Egypt, Philippines, Austria, Poland India etc have been declared less profitable is unclear however if the company studies these markets and adopts a strategy to suit their needs collectively the market share would increase significantly. IMT PLC needs to expand its planning horizons to make global expansion as a factor in the future which adds value. Emerging Tier I and II markets are major survival aids for the long term.
Value Generation: Only based on the financial analysis it was observed that difference between the company's variable costs and revenue is in a good position but can be improved further by reducing a huge amount on yearly impairments that the company writes off. Also there are huge opportunities for IMT PLC to strengthen its existing Logistics business as a robust measure of sustainability in the long future in the midst of uncertain regulations and high risks. Logistics business has not shown any improvements in the past three years. The group needs to focus on utilising logistics as a major business improvement opportunity in times of reducing tobacco markets. According to the Z score calculation by E I Altman the Z score value for IMT PLC is 2.4 which categorises it as a healthy organisation. In the near future IMT PLC has decided to hike prices of products and improve margins to support their operating cash flows and operating profits. It has also strategically sought to invest heavily in sales force to sustain as a defence from any government or legal policy. It is a growing organisation and must increase the workforce to grow efficiently.
Conclusions: The debt position is being monitored but the company is in a secure position overall and performance can improve immensely based on asset utilisation, market share, value generation and volume and margin increase. Although some competitors are better performing and at par, the group performance has been above industry and sector averages also strategic objectives are well defined and being aggressively chased for 2011. The 'value' returns are aimed to start this year on since settlement from mergers are almost done. It is now that shareholder support is required the most and the group ensures optimum returns.
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Appendices I - IMT PLC SWOT ANALYSIS Datamonitor (2008-2010)
Appendices II - Profitability Ratios
Profit Margin = PBIT/Revenue