Thursday, 13 February 2014

Imperial Tobacco - when a reiteration is good enough

Back in November I posted on Imperial Tobacco following its FY13 numbers publication.  The share seemed reasonable defensive valuation back then...

'...on a static FY13A EV/ebit of x10.  The free cash flow yield of the company is just over 7% and this is all paid out (5%+ dividend, the rest in buyback).  Cash conversion also has the scope to improve further (currently 86%)...Medium-term, it is noteworthy that the geographic orientation / portfolio is mature versus some other tobacco companies, but this is countered by the lower valuation versus a BAT for example.  Additionally rumours continue to persist regarding a joint bid for Imperial to break it up by BAT and Japan Tobacco although I do not place any value on such rumours per se' 

Since I have written this, the shares have been a little weak as fears have increased over the company's exposure to Europe and evolving tobacco legislation however, as shown below, they have bounced back today following the publication of the company's interim management statement. 

In the statement the company notes continued volume declines (-5%) but positive price-mix which allowed a 1% Q1 revenue increase.  The important statement though was contained in the outlook comments for their fiscal 2014:

'At the time of the Full Year 2013 results in November, the Company indicated that a reasonable working assumption for Financial Year 2014 was for modest growth in EPS at constant exchange rates, given the Company's commitment to increasing investment behind its growth strategy and implementing its stock optimisation programme to reduce trade inventories and deliver a shorter, more flexible route to market in a number of countries.  There has been no change in the Company's full year expectation for modest EPS growth at constant exchange accompanied by at least a 10% increase in dividend'.

Sometimes a reiteration is enough - even if the 'EPS at constant exchange rates' comment is a bit fuzzy for reported EPS.  A sub x10 EV/ebit ratio plus a now 5-6% prospective dividend yield has unsurprisingly attracted investors today.  The M&A call option noted above stays too.  I retain a good sized holding in my pension fund and would add further, given this extra information, below 2200p. 

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