Imperial Tobacco is Worth Holding on to Despite The Recovery

Source from:  Daily Telegraph 09/23/2009

Imperial Tobacco, which is in the Questor portfolio, yesterday issued a full-year update that reassured the market on various points. There was some concern at the half-year results that the company would not raise the full-year dividend by as much as everyone had expected. Imperial said at the time that its dividend policy was unchanged, "whilst recognising the cash impact of the Altadis restructuring" after its acquisition of the Spanish group in January 2008. Analysts' forecasts were duly lowered and the company seems happier with the current consensus of a 73p full-year dividend. That is still a generous increase from 63p last year and will be welcomed by the many income investors in the stock. Imperial also made comforting noises about cash flow, targeting cash conversion of more than 100pc. Earlier in the year, Imperial boosted production ahead of tax increases in Central Europe in order to avoid the new higher rate as far as possible. These extra stocks of cigarettes and tobacco are now being sold, meaning that cash is flowing back into the business. Imperial has also successfully raised more than £2bn in debt this year, proving that the credit markets are still very much open for high-quality companies. The proceeds were used to make early repayment of a €2bn (£1.8bn) bank facility due to mature in July 2009, with some left over that will go towards the £2.3bn equivalent of loans due for repayment in July 2010. The company is expected to report net debt of about £12.4bn at the full-year results in November, compared with £14bn at the half year. This feels manageable considering the buoyant state of the corporate debt markets and the inherently cash-generative nature of tobacco companies. Imperial guided investors that overall performance for the year to September would be in line with expectations. The market is targeting £2.2bn pre-tax profits generated from £7.7bn net tobacco revenues (which excludes the tax the company collects on behalf of governments). Imperial's budget cigarette brands and rolling tobacco are selling well in mature markets, such as the UK, as taxes rise and consumers trade down. In emerging markets, such as sub-Saharan Africa and the Middle East, it continues to develop its mainstream and premium cigarette brands. Otherwise, Imperial said it was making good progress with the integration of Altadis. It is apparently on track to achieve savings of about €180m by the end of the financial year in September. Further ahead, Imperial expects to make savings of €300m by the end of September 2010, and €400m by September 2012. Looking forward to 2010, Imperial is expected to enjoy a full-year's benefit from raising prices this year. The industry as a whole has managed to boost prices in Spain and Germany, and is set to increase them in France from October. Questor tipped the shares as a buy at £15.82 in June. They are now trading at £17.66 after an impressive run. This price is just over 11 times forecast earnings for 2009, compared with British American Tobacco on 13 times. The price/earnings ratio does not, however, account for Imperial's significant leverage. For that we should look at enterprise value - which includes the company's debt - to EBITDA. By this measure it is also at a discount to BAT, at 8.9 times, compared with 9.5 times. The stock yields a healthy 4.2pc. Hold on for further gains. Enditem