Operational and Capital Allocation Strategies Shine Through in Undervalued Imperial Brands' Fiscal 2022

Imperial Brands reported preliminary fiscal 2022 results that were in line with our expectations, reflecting the shift in strategy from a business chasing new revenue streams to focusing on optimising cash from the company's legacy operations. Imperial continues to benefit from weakness in pound sterling, which has benefited the market valuation of the stock this year, but we think upside remains. Our investment case for Imperial is based on a very low valuation, an attractive 7% dividend yield, and belief that the market is underestimating the duration that Imperial's core cigarette business can continue to generate cash and excess returns on capital. Although that thesis is proving to be slow to play out, several performance metrics in these results support our conviction in it, including strong cash conversion and sensible capital allocation. We reiterate our fair value estimate of GBX 2,900 and believe that, at the close of trading on Nov. 17, there is substantial upside to Imperial's stock. Even after strong outperformance this year, Imperial trades at under 10 times our estimate of fiscal 2023 earnings.