More on IMB26 Sep 2023 12:54
Imperial Brands has recovered some of Monday’s losses which followed reports that the UK was considering introducing a New Zeland-type smoking ban in the UK.
Shares are around 2% higher at 1,673.50p and Barclays thinks these worries are overdone, pointing out it is not a new discussion by the UK government.
The broker noted in "The Khan review - making smoking obsolete" published in June 2022, Dr Javed Khan alluded to following the NZ model.
“We doubt any such proposal will pass the current fractured UK parliament with elections looming over the next 12 months,” Barclays said.
“The UK government has yet to ban disposable e-cigarettes, which almost all stakeholders agree is a problem, so any cigarette ban is likely far off, in our view,” it added.
The broker modelled a scenario under which a NZ-style cigarette control proposal passes the UK parliament, with an implementation date of 2027.
It said this proposal would imply a c1.6% incremental headwind to cigarette volumes - from 2027.
Even under this proposal, the last cigarette sale in the UK would happen in 2087 it noted.
Barclays estimates the UK cigarette industry Ebit is structurally declining at a rate of c3% per annum, and thinks proposal would accelerate the decline from c3% to c5%.
But it suggests the void could then to be filled by lower taxed e-cigarettes, heated-tobacco and modern oral products, leaving the overall industry Ebit stable.
Barclays kept an overweight rating but trimmed this price target to 2,400p from 2,550p.
It highlighted the potential for share repurchases and the 8% dividend yield.