Broker Round-up: BATS to Smoke E-cig Rivals Suggests Citigroup

Source from:  Proactiveinvestors UK Ltd (uk)  08/07/2013

Having launched its Vype e-cigarette in the UK just last week, BAT Industries (LON:BATS)is poised to seize the lead in NexGen nicotine products, according to US broker Citigroup.

BATs may now be best known for its Dunhill and Lucky Strike brands, but the US broker believes innovation will become an increasingly important driver for the tobacco and cigarette giant.

Citigroup expects Vype to do well in the existing, unregulated e-cig market, but it is with the next range of products that it sees BAT really putting some distance between itself and rivals.

The broker expects BAT to launch two new products with medical licences over the next two years and these licences will be key in the future as Citigroup expects unlicensed products to be banned from 2016.

As Citgroup also sees most existing products failing to get a licence, BAT will have a significant first mover advantage.

One the two new products is cigarette-shaped stick that contains a nicotine aerosol spray that initial capex suggests sales in the ballpark of  £100m-£150m, suggests Citigroup.

BAT is also upping its innovation on conventional cigarettes including capsules that convert light-tasting cigarettes to stronger flavours and hi-tech filters.

A 10% share of the UK e-cig market alone would add about 1% to Western Europe sales, but BAT seems to have ambitions well beyond this says Citigroup. 'Buy' is its stance with a price target of £40.

There may have been more to the termination of talks over the sale of Smiths Group's (LON:SMIN) medical division than just cash, speculates UBS.

The technology company announced late on Friday afternoon that it had not been possible to reach agreement with the potential counterparty on acceptable terms for a transaction.

The decision to terminate talks may "raise concerns on management's commitment to proactively manage Smiths' portfolio to realise the intrinsic value of the businesses, in our view, and could deter potential bids from buyers for other businesses in Smiths portfolio".

As a result, UBS keeps its sum of the parts-based price target of 1,400p unchanged.

Ophir Energy's (LON:OPHR) shares aren't currently worth buying because its 'value triggers' are slipping, according to investment banking heavyweight UBS.

The problem, it says, is that venture partner BG is focussing on the known resources in Block 1, Tanzania, whereas the value already priced into Ophir relies upon more new resources being found through exploration.

The Swiss bank today downgraded the oil firm from 'buy' to 'neutral' and cut its target price to 375p from 475p.

"Implicit within Ophir's share price then are expectations of significant further resource additions," analyst Jon Rigby said in a note.

"A material prospect inventory and excellent historical drilling success rates to some degree justifies this.

"However, it now appears BG Group has opted to focus on appraisal of discovered resource in Tanzania during 3Q13 rather than testing the giant outboard structures in Block 1.

Thomas Cook (LON:TCG) impressed Citigroup with third quarter numbers and the US broker believes the shares are now worth 195p, or 39p more than this time last week.

Citigroup was especially impressed with the cost savings being generated at the package tour operator and expects these to drive "material increases to earnings" over the next three years.

The broker upgraded its earnings forecast for the next three years, but if the management can generate so revenue growth suggest the broker, there is potential for further upside, in the broker's view. 'Buy' is its stance.

Societe Generale, meanwhile, has downgraded state-owned bank Royal Bank of Scotland  (LON:RBS)  to sell (from hold), though the target price is unchanged at 305p. RBS's non-performing loans remain within 1% of their peak, while those at Lloyds and Barclays are down 39% and 25% respectively.

The broker wonders if the new chief executive and finance director may be tempted to top up provisioning here, perhaps as a compromise for the government not pursuing a bad bank structure.

SocGen estimates that another £1bn could be needed; not enough to threaten capital, but probably enough to weigh on sentiment. Enditem