Imperial Brands at Last Performs to its Potential in First-Half Fiscal 2021; Shares Undervalued

After four years of lousy underperformance, Imperial Brands finally delivered some validation for our investment thesis in the first half of fiscal 2021. We think Imperial's model is intact, but performance has suffered from misplaced organic investments for several years. Although we believe the company has a wide economic moat, Imperial is not the highest-quality franchise in the tobacco group, and shareholders should not expect it to lead next generation, or NGP, categories. However, we retain our belief that if the company can sustain this volume and margin performance going forward, the future cash flows of the business are materially undervalued. The lukewarm market reaction to the strong report, however, indicates sentiment remains very low. We have increased our effective tax rate assumption from the second half of fiscal 2021 onwards by 100 basis points annually to account for the Biden administration's plans to increase U.S. corporation tax, but this offsets a slightly better-than-expected performance in the first half, and we are retaining our GBX 2,900 fair value estimate.