Imperial Tobacco Sells off Assets

Imperial Tobacco is selling part of its logistics company, but analysts say they do not expect the sale to affect the stock's fair value estimate

Philip Gorham 11 June, 2014 | 9:06AM

Imperial Tobacco (IMT) has announced that it is to sell part of Logista, its logistics business acquired with the Altadis purchase in 2007, through an IPO on the Spanish stock exchanges. Given that the firm had already announced that it was reviewing strategic options for the business, we are not surprised at today's announcement because we do not think the capital-intensive logistics business adds a great deal of value to Imperial's core tobacco business.

Imperial will retain its direct distribution capabilities, so we do not think this affects our wide economic moat rating. We are also retaining our £26 fair value estimates for the shares and ADRs, respectively, until the pricing of the IPO is revealed, but we doubt it will have a material impact on our valuation.

Distribution is a capital-intensive business that is detrimental to both margins and returns on capital. Imperial's tobacco business, although smaller, generates operating margins north of 40%, in line or above those of larger rivals Philip Morris International and British American Tobacco. Its logistics business, on the other hand, generates a low single digit operating margin, dragging the overall margin to the low-30% range (on a normalised basis) and returns on capital to the mid-teens, well below the 30% ROIC of its larger competitors.

In addition, direct store distribution (DSD) adds little, strategically, to the tobacco business. Unlike the soft drinks industry, for example, in which we believe DSD generates a competitive advantage because it provides the ability to influence shelf space and product placement, in-store displays of tobacco products are more heavily regulated in developed markets, so the competitive advantages of DSD are limited.

DSD is still worthwhile in some markets, however. Philip Morris International (PM) acquired a stake in a distributor in Russia in December 2013 in order to refine its route to market and protect the industry profit pool. However, in general, we believe that tobacco companies will increasingly shy away from vertical integration into the distribution channel.

The only surprise about the carve-out of Logista is that Imperial is retaining a majority stake. This means that the business will continue to be reported as a subsidiary under the consolidation method, and that the asset-heavy business will continue to weigh on returns on capital and profitability. Retaining a minority stake would have allowed Imperial to report Logista not as a consolidated subsidiary, but as an investment, and remove the distribution assets from the parent company's balance sheet, while still retaining influence over the business. We expect Imperial to reduce its stake over time.

Historical transactions of tobacco distribution businesses are few, but we estimate the valuation of the logistics business could be around £1.1 billion, based on 6x 2013 EBITDA and 1.2x 2013 sales. This is well below the 14x EBITDA that Imperial originally paid for Altadis, but that deal included the tobacco assets of Altadis that are not included in the Logista IPO. We expect Imperial to use the cash to pay its dividend, make small acquisitions, and invest in the organic growth of its next generation products.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Imperial Brands PLC1,634.50 GBX-0.40
Philip Morris International Inc80.94 USD-0.30

About Author

Philip Gorham  

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies