Tobacco Group Imperial Brands Falls on Outlook Concerns

Source from:  The Guardian 09/22/2016

Imperial Brands, the tobacco group behind Lambert & Butler, Gauloises and Rizla, is leading the FTSE 100 fallers after a broker downgrade.

Its shares hit an all time-high last month as investors snapped them up for their dividend yield, but are now down 80p at £39.27.

The fall follows analysts at Credit Suisse cutting their recommendation from outperform to neutral and their target price from £42.50 to £40. They expected 2017 to be a challenging year after the initial benefits of Imperial's £4.2bn purchase of four brands following the merger of US groups Reynolds and Lorillard last year. They said:

A combination of a low take-out multiple, cheap debt and strengthening dollar means we estimate the Lorillard acquisition will have added 23% to earnings (and a similar increment in free cash flow) by the end of 2016.

However looking into 2017 the ‘Lorillard story’ will have largely run its course (with a risk that Winston/Kool's momentum slows as the impact of the price reset subsides) and we anticipate a significant headwind in the UK. The deep- discount segment's share of the market is growing rapidly (which is lowering the average selling price) even before the ‘sticker shock’ of moving to packs of 20 sticks and standardising packaging (by May 2017). Disconcertingly, although over-indexed in the deep discount segment Imperial is currently losing market share...

We anticipate Phillip Morris, BAT and Japan Tobacco will increasingly redeploy some of their premium and mainstream brands into the value segment, where Imperial is currently over-represented (with a still relatively fragmented brand portfolio).

In contrast, analysts at Jefferies were positive on the company:

We assume coverage of Imperial with a buy, a target price of 4600p and 12 month total shareholder return of around 20%. While not peer best, we believe actions the company has taken has positioned it well to deliver earnings per share growth of mid single digit over the medium to long term. This in turn should support a continued 10% dividend increase each year. We still believe the valuation is yet to be given full credit for this attractive returns outlook.

Elsewhere Sainsbury's is up 4.4p at 248.9p despite some ambivalence in a report from Barclays analysts:

The investment case on Sainsbury is intriguing, in our view, with potentially strong arguments on both sides. The core Sainsbury business is seeing relatively weaker sales trends than for some years, but this is to some extent the inevitable result of ending multibuy offers and may not be such bad news for the bottom line as the top line. We struggle to feel comfortable about the underlying outlook for the acquired Argos business but can see that synergies could more than compensate for foreign exchange and consumer headwinds. Sainsbury has significant pension liabilities but offers a free cash flow yield of around 9-10%.

The shares are heavily shorted but have underperformed Morrison by a remarkable 50 percentage points year to date. If Sainsbury can provide visibility on earnings then upside could be considerable, but we fear this may be difficult until at least Christmas is out of the way and we have a better picture of Argos’ profitability. We reiterate our equal weight rating and our price target of 270p. Enditem