Recommendations » UK

Imperial Tobacco (LON:IMT.L) report: Final results in line, stock looks cheap

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

- Imperial Tobacco reported final results this morning in line with expectations, though the eps figure was a touch behind our forecast

- Volumes were down by 3%, as measured by white stick equivalents (a blend of cigarette and fine cut tobacco volumes), as flagged in the preclose statement. Cigarette volumes were down 4.2% but this was mitigated by a rise in fine cut tobacco volume, where IMT is the world leader, of 8.7%. Weak volumes in Eastern Europe have been a particular drag.

- Tobacco net revenue rose by 3%, as flagged, to ?7055m, just ahead of our forecast of ?7023m.

- Adjusted operating profit rose by 5% to ?3067m, slightly ahead of our forecast of ?3000m.

- Adjusted eps was 178.8p, up 11%, a touch behind our estimate of 182.8p due to a higher tax charge.

- A final dividend of 60.0p makes 84.3p for the year, up 15%.

- The group generated ?2bn of free cash flow before dividend payments which enabled it to pay down net debt by ?1.5bn to ?9.3bn. This represents cash conversion of 97%, towards the top of the group’s target range of 90- 100%.

- The valuation looks undemanding. The p/e is 11.3x for Sept ’10, falling to 10.2x for next year and the yield is 4.2% rising to 4.8%. As volumes recover in Eastern Europe and the group continues to drive efficiency gains, eps growth of around 10% looks assured over the next couple of years and, with good cash conversion allowing strong dividend growth, the stock looks cheap. Note that BAT trades on a p/e of 13.7x for Dec ’10, falling to 12.7x and a yield of 4.8% rising to 5.1%.