imperial tobacco group plc

IMPERIAL TOBACCO GROUP PLC

2014

FINANCIAL ANALYSIS

STUDEND ID: 21242444

Hardik.B.Bendbar

2

Content Page Number

1. Introduction

Imperial Tobacco Group PLC 3

2. Accounting Ratio

Performance Ratio 3

Liquidity Ratio 4

Gearing Ratio 5

Investors Ratio 7

Efficiency Ratio 8

3. Financial Analysis (Market Figures) 12

4. Share Valuation

NAV, NAVPS 13

Dividend Valuation Model 14

5. Investment Assessment

Historic Price Earnings Ratio 16

Prospective Price Earnings Ratio 17

Conclusion 18

Appendix 20

Bibliography 23

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IMPERIAL TOBACCO GROUP PLC

INTRODUCTION

Imperial Tobacco Group Plc is a British based multinational tobacco company

headquartered in Bristol, United Kingdom. It is the world’s largest producer of tobacco

papers, cigars and fine-cut tobacco. In terms of market shares, it is ranked among the top

four cigarette company of the world. Imperial Tobacco has 51 plants worldwide and

produces over 320 billion cigarette per year with its products marketed over 160 countries.

Its major brands are Rizla, Davidoff, JPS, Golden Virginia, and Drum. It is listed in London

Stock Exchange with market capitalization of 24.3 billion pounds as of 23 December 2011,

the 19th largest of any company with primary listing on LSE. (Wikipedia, 2014)

Main Body

Accounting Ratios

1) Performance Ratio

1.1) Return on Capital Employed

ROCE

4

ROCE

2013

(Figures in £’m )

2012


OPBT X 100%

CE

1958 X 100%

28,418-11,082

1518 X 100%

27,639-9,142

11.29%

8.2%

Interpretation

ROCE gives the ability to management to make sound investment. It is the only ratio

which measures the performance of the company.

It is the ratio of profitability which measures the efficiency with which the investment

made by shareholders and creditors is used in Business.

ROCE of Imperial Tobacco in the year 2012 was 8.2% which can be considered to

be an average performance when it comes to make profit.

However in 2013, ROCE increased to 11.29% from 8.2% (an increase of 3.09%)

which indicates that the profit making ability increased but it can be still considered

as an average performance.

The main reason for the increase in ROCE for the year 2013 can be due to operating

profit generated by the Imperial Tobacco was higher then what was in 2012.

Although there was increase in current liabilities in the year 2013 but there was also

an increase in gaining total assets which resulted into decrease in Capital Employed

in 2013.

2) Liquidity Ratio

2.1) Current Ratio

CR

5

Current Ratio

2013


2012


Current Assets

Current Liabilities

28,418 11,082

27,639 9,142

2.56 times

3.02 times

Interpretation

Current Ratio is the financial ratio which gives the ability to measures that

whether a company can repay its debt or not in its forthcoming business

cycle.

Current ratio of Imperial Tobacco in 2012 was 3.02 which indicate that its

ability to repay debt was 3.02 times whereas in 2013 it reduced to 2.56 times

which can be still considered as safe liquidity.

The main reason in the decrease in Current ratio for the year 2013 can be

due to the increase in possession of current assets and current liabilities.

Although there was a decrease in current ratio in 2013 from 2012, still it can

be said that company’s operating efficiency is stable and capable enough to

pay its obligation.

3) Gearing Ratio

Gearing Ratio

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Gearing Ratio

2013


2012


LT Debt X 100 % Capital employed

7,858 X 100% 17,336

8,333 X 100% 18,497

45.32%

45.05%

Interpretation

Gearing Ratio indicates the amount of leverage of the company.

In 2012 the Gearing ratio was 45.05% which shows that 45.05% of their total

capital has been borrowed.

Whereas in 2013, the gearing ratio was 45.35% which was almost similar to

the previous year.

The company is been able to maintain a stable position in keeping its

finances properly regulated.

Although there was a slight decrease in gearing ratio in 2013 but it can still be

considered as low gearing ratio which as an investor/lender point of view

increases the chances of investing capital as the company is financially

sound.

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4) Investor’s Ratios

4.1) Interest Cover

Interest Cover

Interest cover

2013


2012


Operating Profit Interest Payable

1958 697

1518 437

2.80 times

3.47 times

Interpretation

Interest Cover Ratio is used to determine the company’s ability to pay its interest

expenses on its outstanding debt. (Managementstudyguide.com, 2013)

Imperial Tobacco’s interest cover for the year 2012 was 3.47 which show that it can

cover its interest 3.47 times in its present business cycle. This also indicates that the

firm is financially stable and can take a chance of increasing its borrowings in order

to expand its business.

In 2013, there was a drop in Interest Cover from 3.47 to 2.80 which indicates that

company’s interest covering/paying capability has been decreased by 0.67.

The main factors contributing for drop of interest cover can be due to increase in the

financial expenses incurred during the year 2013; however there was stable increase

in operating profit too.

Although having a considerable drop in Interest Cover , 2.80 can be still considered

as good interest cover ratio and thus making this company more solvent.

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4.2) Price Earnings Ratio

Price Earnings Ratio

(in pence)

Price Earnings Ratio

2013


2012


Share Price

Earnings per share

2487 96.2

2576 68.1

25.85 times

37.83 times

Interpretation

Price Earnings Ratio gives the idea to its investors that whether the

company’s share has growth potentials or not.

The price earnings ratio in 2012 was 37.83 which considerably decreased to

25.85 in 2013.

The main reason for the drop can be due to two factors firstly, decrease in

share price and secondly, increase in EPS.

The ratios for both the years are very high which indicates that it’s not risky

to invest but it will take long time to yield profits.

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4.3) Dividend Yield Ratio

Dividend Yield Ratio

Dividend Yield Ratio

2013


2012


Annual Dividend x 100 %

Current Value of the Share

109.10 x 100 %

2487.00

98.70 x 100%

2576.00

4.38%

3.83%

Interpretation

Dividend Yield gives the information of how much the company is paying its

dividend every year with respect to its market share price.

In 2012, the dividend yield was 3.83% which increased to 4.38% in 2013.

A yield of 4.38% can be considered to be high; indicating that share price of

Imperial Tobacco will be on low side.

A yield of 3.83% in 2012 is relatively low compared to 2013’s yield of 4.38%,

thus indicating that the market share price would be relatively on higher side

than that in 2013.

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5) Efficiency Ratios

5.1) Equity Turnover Ratio

Equity Turnover

Equity Turnover Ratio

2013


2012


Net sales Average Total Equity

28,269 5,648

28,574 6,084

5%

4.69%

(Investopedia, 2009)

Interpretation

Equity Turnover Ratio helps to calculate rate of return on common equity while at the

same time measures that how well a company is using its stakeholder’s equity for

generating its revenues.

There has been slight increase in the ratio from year 2012 which was 4.69% to

2013 which was 5%.

Thus the Equity Turnover Ratio can be considered to be high for 2013 which

indicates that the company is efficiently using its capital than its previous year

2012.

6) Employee Ratio

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6.1) Sales per Employee

Sales per Employee

Sales Per Employee

2013

2012

Total Revenue/sales

No of Employee

28,269£’m 35,300

28,574£’m 37200

800821.53 £

768118.28 £

(Imperial Tobacco Group Social Performance Data 2013, 2014, p. 1)

Interpretation

It is a ratio which shows the company’s sales with respect to number of employees.

(Mcclure, 2009)

SPE in 2012 was 768118.28 £ which increased to 800821.53 £ in 2013, which

shows that company is generating higher sales.

Thus the company’s overhead cost can be lowered and therefore increasing the

credibility of the workforce which in-turn will result in generating healthy Profits.

Thus the company has become less expensive to run then 2012.

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Market Figures for Imperial Tobacco Group Plc

7) Dividend for Last 5 years

Years

2014

2013

2012

2011

2010

Dividend

81.2

109.1

98.7

88.10

76.30

(Dividendinvestor.co.uk, 2014)

8) Market Capitalisation Figure

(Uk.reuters.com, 2014)

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Current Share Price: 2487.00 GBp

Equity Beta Value: 0.41

Market Cap (Mil): £ 24,001.23

9) Shares Valuation

9.1) Net Asset Value (NAV)

NAV

NAV

2013


2012


TA-TL

28,418-22,770

27,639-21,555

5648

6084

Net Asset Value per Share

NAVPS

NAVPS

2013

2012

NAV

No of Shares

5648 965.1

6084

931.72

5.85 £

6.54 £

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Interpretation

It is an expression which indicates the value of each share for a fund or a

company.

The value of each share has been decreased from 6.54 £ (2012) to 5.85 £

(2013) which indicates that value of each share has been dropped by 0.69 £.

It is more advisable to use NAVPS for long tern changes in stock rather than

fund as funds periodically distribute the capital gains among the shareholders.

9.2) Dividend Valuation Model (DVM)

Dividend Growth Model:

Where P0 = Current Price of the Share

d0 = Last Dividend Paid

g = Growth Rate

KE = Rate of Return

Before calculating P0, we need to calculate g and KE.

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Given data:

Risk free Return (Rf) = 2.5%

The Market Return (Rp) = 4%

= 0.41

KE =?

g=?

Formulae for Return on Equity (KE)

KE = Rf + Rp

= 2.5% + (0.41) 4%

=2.5 + 1.64

=4.14% or 0.0414

Thus KE = 0.0414

Gordon Model for Growth Rate (g)

g =

Where n = number of steps or years- 1

d last = last dividend paid (2014)

d first = first dividend paid (2010)

g =

– 1

= 1.01

= 0.01

Thus g = 0.01

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Now putting the values of ‘g’ and ‘KE’ in the Dividend Growth Model

Pence

Interpretation

Current market price of Imperial Tobacco Group Plc is 2487.00 pence and the value

obtain by DVM is 2611.84 pence, which indicates the following possibilities.

a) Current Market price of IMT is under-valued at present and has a chance of

appreciation in future time.

b) As a shareholder point of view it is advisable to hold the shares at present or

can purchase more shares which can yield to profitability in future.

c) Although the current share price is undervalued but it can’t be assured that the

share price would go up in future time as DVM doesn’t include economic and

market fluctuation.

9.3) Historic Price Earnings Ratio

Historic PER

17

Interpretation

The historic P/E ratio of IMT 36.52 is very high as compared to its major competitor

British American Tobacco Industry whose historic P/E ratio is 16.34.

Which indicates that the company is not risky but as a investor point of view, this

company will take long time to yield profits from their investment.

Whereas BATI is slightly risky but can yield short term profits, if invested in it.

9.4) Prospective Price Earnings Ratio

=

Where d1 = Last dividend paid

E1 = Earnings per share

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Interpretation

Prospective P/E ratio is more realistic and acceptable than historic P/E ratio as it

focuses on future growth of the company.

The assessment shows that IMT’s shareholders will expect higher earnings from the

shares they have invested in but it will take sufficiently longer time.

Prospective P/E ratio is more forward looking ratio and by the ratio we obtained

27.22 can be consider as high ratio which allows IMT to projects itself to high

position. This is very important for a company as forward projection helps in stock

pricing consideration.

Conclusion

Based on the research carried on financial aspects of Imperial Tobacco Group Plc through

various accounting ratios and models, we can conclude that

Performance of the company has been improved than compared to 2012’s

performance.

IMT is capable enough to pay its obligation and has safe liquidity.

The borrowing of the company is well maintained which makes it more financially

sound.

The efficiency of IMT to pay back or cover its interest has been decreased

considerable, but it can still be considered as solvent company.

It has high P/E ratio which indicates that investment in its share would be less risky

but would be taking longer time to yield profits from it.

As the dividend yield is high, the share price of IMT will tend to be on lower side.

The company has become less expensive as the sale per employee has increased

which in turn can result into high profits.

There has been considerable drop in the value of each share of IMT.

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The shares are undervalued at present but can be a good option for the investors to

invest by keeping in mind that the profits won’t be obtained in shorter period of time.

“Thus if the investors are willing to take chance in investing for a longer period

of time than it can be recommended to invest in the shares of IMT, while

keeping in mind that price per share won’t yield that much profit.”

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Appendix 1

(Annual Report 2013, 2013, p. 87, 89, 91)

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Appendix 2

(Annual Report 2013, 2013, p. 87, 89, 91)

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Appendix 3

Historic P/E ratio for British American Tobacco Plc

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Bibliography

Annual Report 2013. 2013. [e-book] p. 87,89,91. Available through: www.imperial-

tobacco.com https://www.imperial-

tobacco.com/files/financial/reports/ar2013/files/pdf/annual_report_2013.pdf [Accessed:

12 Mar 2014].

British American Tobacco News Release. 2014. [e-book] p. 11. Available through:

www.bat.com

http://www.bat.com/group/sites/uk__9d9kcy.nsf/vwPagesWebLive/DO72TJQU/$FILE/

medMD9GQEME.pdf?openelement [Accessed: 15 Mar 2014].

Dividendinvestor.co.uk. 2014. Historical. [online] Available at:

http://www.dividendinvestor.co.uk/historical.php?exg=GB&symbol=IMT [Accessed:

17 Mar 2014].

Imperial Tobacco Group Social Performance Data 2013. 2014. [e-book] p. 1. Available

through: www.imperial-tobacco.co.uk http://www.imperial-

tobacco.co.uk/assets/files/cms/2013_Social_performance_data.pdf [Accessed: 14 Mar

2014].

Investopedia. 2009. Operating Efficiency Ratios - CFA Level 1 | Investopedia. [online]

Available at: http://www.investopedia.com/exam-guide/cfa-level-1/financial-

ratios/operating-efficiency-ratios.asp [Accessed: 17 Mar 2014].

Managementstudyguide.com. 2013. Interest Coverage Ratio - Meaning, Assumptions and

Interpretation. [online] Available at: http://managementstudyguide.com/interest-

coverage-ratio.htm [Accessed: 11 Mar 2014].

Mcclure, B. 2009. Doing More With Less: The Sales-Per-Employee Ratio. [online] Available

at: http://www.investopedia.com/articles/stocks/04/110304.asp [Accessed: 15 Mar

2014].

Uk.finance.yahoo.com. 2014. IMT.L Historical Prices | IMPERIAL TOBACCO Stock -

Yahoo! UK & Ireland Finance. [online] Available at:

http://uk.finance.yahoo.com/q/hp?s=IMT.L&b=1&a=02&c=2012&e=16&d=02&f=201

2&g=d [Accessed: 13 Mar 2014].

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Uk.reuters.com. 2014. Stocks. [online] Available at:

http://uk.reuters.com/business/quotes/overview?symbol=IMT.L [Accessed: 12 Mar

2014]. Viewed at 3.29pm Gmt

Wikipedia. 2014. Imperial Tobacco. [online] Available at:

http://en.wikipedia.org/wiki/Imperial_Tobacco [Accessed: 12 Mar 2014].

imperial tobacco group plc

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