Imperial Tobacco Group Ordinary 10p (IMT)

Company overview

Imperial Tobacco Group PLC is the world's fourth largest international tobacco company. It is the second largest UK-based tobacco company by global sales. Imperial Tobacco's corporate headquarters are in Bristol. The Group's core activity is the manufacture, marketing and sale of tobacco and tobacco related products. Imperial is the world leader in roll-your-own, rolling papers and tubes. Group brand names include Lambert & Butler, Davidoff, Rizla, John Player, Navy Cut, Woodbine, Richmond, Golden Virginia, Embassy, Regal, Super Kings and many others. Trading in many markets around the world, the group is market leader in the UK and holds second place in Germany. The company has 56 manufacturing sites and around 38,000 employees. The Company is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

HL Comment (1 February 2012)

Ahead of the group's Annual General Meeting to be held later today, Imperial Tobacco issued an interim statement. The announcement revealed that the overall financial position and operational performance of the group for the financial year to 30 September 2012 was in line with the Board's expectations. The group reported underlying sales momentum with good progress in emerging markets and EU gains. Turning to the quarter ending 31 December 2011, underlying stick equivalent volumes declined 1% but reported stick equivalent volumes were down 7%, against a strong comparator, due to the on going impact of international sanction compliance in Syria and double digit market volume declines in Spain. Outlook commentary saw management declare that "Delivering the planned acceleration of our underlying sales momentum whilst continuing to realize cost and cash opportunities remain group priorities".

Negative Points:

• Imperial has suffered in Spain from a price war as the market fell due to duty rises, a ban on smoking in public places and rising unemployment.
• The company is highly dependent on its larger competitor - Philip Morris's pricing decisions. Historically, Philip Morris has been known to spark a price war.
• Sales suffered as a result of United Nations sanctions on Syria due to the 10-month uprising. Furthermore, price hikes in Ukraine and the United States led to trade destocking.
• The company is exposed to currency translation and transaction risk.
• The tobacco industry is exposed to litigation which could have a significant impact on future operational and financial performance.
• The UK (or other governments) may introduce rules requiring "plain packaging", the consequences of which may lead to a significant decline in profits in the markets affected.

Positive Points:

• One of Imperial's investment priorities is to build further its position in growth markets such as Eastern Europe, Africa, the Middle East and Asia, which show rising adult and middle-class populations.
• The group holds investor appeal as it is a highly defensive predictable cash generator with a progressive dividend policy.
• Imperial Tobacco benefits from good geographical diversification (products are available in over 160 countries worldwide) and a multi-product portfolio provides a degree of business resilience and a strong platform to deliver future growth.
• The group reported that luxury Cuban cigar volumes were up 14% in emerging markets.
• Imperial has been linked with sporadic talk as a takeover target by larger peers. Low debt, robust cash generation and modest organic growth are attractions.

Consensus:

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.