Nomura tells clients to cut down on Imperial Tobacco
Nomura continued to recommend clients cut back on cigarette maker Imperial Tobacco, taking a dim view of prospects for its core business and US market share pressure.
FTSE 100
7,895.85
16:59 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
Imperial Brands
1,774.00p
16:40 19/04/24
Tobacco
26,231.59
17:10 19/04/24
On the release of nine-month results from Imperial, Nomura was not terribly impressed by organic sales growth excluding forex of 2%, short of consensus forecasts of 2.6% due to volumes falling 3% versus the consensus estimate of 2%.
Just before the end of the third quarter, Imperial completed the £3.6bn US acquisition from merging Reynolds and Lorillard of key brands such as Winston, Salem and Kool cigarettes and Blu ecigarettes.
"Now the US deal is out of the way, we believe focus comes back to the core and the ability to deliver with the US assets," said Nomura. "We see Imperial falling short of expectations in both of these areas."
Acknowledging that it will take until later in the year before clear signs emerge of how the deal has affected US performance, the Japanese bank believes these results highlight the increasing pressures on market share Imperial is facing in its key markets, even with the support of management's 'migration programme' of converting popular local and regional favourites into global products.
"With investment also largely limited to costs savings from the brand migrations themselves, we believe these pressures will persist."
As it reiterated its 'reduce' rating and 2720p target price, Nomura analysts argued that the common argument that Imperial is cheap was wrong, "on a relative basis".
Its next-twelve-months p/e ratio has always traded at over a 20% discount to British American Tobacco, which Nomura rates a 'buy', "but this has now come in to around 17% but with a weaker growth profile on our estimates".
Meanwhile, "with little earnings growth likely over the long run" the share's support from the board's commitment to attractive dividends "only supports a price of around 2900p per share", well short of the current 3,250p level.