Imperial Tobacco Lights Up for Income-Seekers

Source from:  Telegraph.co.uk 07/26/2010

ALTHOUGH investing in tobacco companies is not to everybody's taste, the valuation of Imperial Tobacco at the moment looks pretty compelling - especially for income-seekers. Last week, the company tabled a third quarter update that disappointed the market - although the shares had been falling ahead of the announcement. Imperial's cigarette volumes for the nine months to June were down 4.3pc as a result of market declines in Spain, the US, Russia and Ukraine. In Spain, which is suffering badly in the downturn, conditions were described as "challenging". Cigarette volumes sold in the 12 months to June slumped by 11pc to 76.9bn because of falling tourism and rising unemployment. Consensus expectations for the full year are unlikely to change by much - if at all - as pricing remains strong and is expected to counteract the fall in volumes in some markets. A lot of the fall in sales was also in Imperial's low-price and low- margin brands. Earnings per share are expected to rise 11pc in the current year. The performance in the UK, Germany and France was largely as expected. The UK was stable, Germany's cigarette market volumes fell 2pc, with modest share gains and growth in fine cut. French market volumes were up 1pc. In its "rest of the world" segment, the performance in Russia and Ukraine was dire, with Russian volumes down 11pc and Ukraine volumes 8pc lower. However, the group made cigarette share gains in a number of markets, including Taiwan Kyrgyzstan, Saudi Arabia, Australia and Senegal. The company is continuing to work on its balance sheet. Imperial took on a lot of debt during its ￡11bn purchase of Spanish group Altadis in 2008, with total borrowings now at ￡11.4bn after an increase in working capital in the first half of the year. The group managed to cut its debt by an impressive ￡2bn last year and debt should be reduced steadily over the next few years. This will have a positive effect on the share price as the balance sheet is deleveraged. The shares are trading on a September 2010 earnings multiple of 110.4 times, falling to just 9.6 next year, which does not look expensive. The current-year prospective yield is 4.5pc, rising to 5.1pc in 2011, which is attractive. The shares were first recommended on November 30, 2008, at ￡16.18 a share. They are now up just 15pc compared with a market up 31pc. Investors seeking income should use the recent weakness as a buying opportunity. Enditem