Outlook for Tobacco

Published by Jim Levi on 17 November 2009.
Last updated on 17 November 2009


There really seems to be only one problem with Imperial Tobacco: the potentially lethal products it manufactures. If you can get your conscience over that major ethical hurdle, it is hard to fault the shares as an investment - particularly if you are looking for yield.

A recent trading update from the company shows that its management is moving with impressive nimbleness to counteract the effects of global recession.

The acquisition of Spanish tobacco giant Altadis in 2008 has now given the group dominant positions in the French and Spanish markets as well as in Germany and the UK.

Puffing away

In the meantime, the company has been busy promoting its cheaper brands to keep the traditional customer base puffing away. On top of this, the group is successfully exploiting fast-growing markets in the Middle East, Africa and the former Soviet bloc.

The net result of all this has been some impressive financial performance forecasts for the next couple of years. Results due this month are expected to show dramatically higher profits, debt levels falling sharply and dividends rising significantly.

Stockbroker Evolution Securities thinks the dividend will be 81p a share by 2010, compared with just 63.1p in 2008. That puts the shares on a prospective yield of 4.4%.

It does not do a company's share price any harm if Jim Slater, the doyen of share tipsters, spotlights the merits of your business. Education Development, an AIM-listed minnow in the training field, is still basking in the glow of recent Slater accolades. In the past year the shares have climbed from 27.5p to 129p.

In the year to September 2008, profits grew from £2 million to £2.7 million, but for the year just ended they are now expected to reach £8.1 million.

Despite this spectacular growth in the UK and dozens of overseas markets, the shares sell on only 11.5 times expected earnings. They still look good value.

Plastics group Victrex's shares have been on a nerve-jangling roller coaster ride over the past year or so. They peaked at 829p in September 2008 before plunging to 371p by December in the bear market. Now they are back up to 761p and look like making further progress.
While the group's sales of bio-materials to the medical device industry have continued to boom, sales of polymers to automotive, aerospace and electronics customers have been hit hard.

Data issued by the company in September suggests recovery is under way. The half-year figures showed profits were down from £27.2 million to £10.2 million and the full-year figures may be as low as £23 million (£55 million last time).

But the market seems to be ignoring this in the belief that the previously impressive growth record in dividends and profits will soon be resumed.

New oil fields

AIM-listed oil explorer BowLeven was savaged in last year's bear market, with its shares tumbling from a peak of 423p in May 2008 to a December low of 25.5p. They have since climbed back to 87.5p with the emergence of evidence that the group has made a couple of good commercial oil discoveries in shallow waters off the coast of west Africa.

The company has struck up a partnership with Vitol, a Geneva-based energy trading group that will fund an estimated $225 million (£139 million) of exploration and production in return for a 25% stake in the business. The shares are clearly not for the nervous investor but could recover further.

With J20, Tango and Robinsons in its portfolio, the Britvic soft drinks group could easily attract a takeover from a brand-hungry US foods group.

Certainly, there are some bullish smoke signals coming from the stockmarket. Britvic shares have almost doubled in value in the past year and are now within striking distance of the 400p all-time high seen in 2007.
In 2008, profits fell from £55.6 million to £51.8 million, but directors still gave the dividend a 15% boost. For the year just ended, the consensus is that profits will hit the £83 million mark after an impressive half-year bulletin in May, which announced an 8% dividend hike.

The shares still have their attractions, if only because of the 4% yield on offer.

Shares in Euromoney Institutional Investor, the specialist financial publisher, plunged from 684p in May 2007 to a low of 147p in March 2009. But they have enjoyed a strong recovery since despite a grim half-year bulletin in May from chairman Padraic Fallon. The company recorded a £41.8 million loss for the period after restructuring charges.

Now financial markets are more positive, the consensus forecast among brokers for the year just ended is that profits will come in as high as £57 million, compared with £37.4 million last time.

Although there are fears the full-year dividend will be cut from 19.25p to just 12.5p, the shares still only sell on 10.5 times expected earnings; a modest rating if an upcoming results bulletin is more bullish.

The half-year bulletin in May from chief executive Terry Sweeney was highly reassuring for shareholders in RM, the IT group supplying computer services to the educational sector.

Profits were 24% higher at the six-month stage and brokers such as WH Ireland lifted their full-year forecasts to £17.8 million, compared with £15.3 million last time.

With an order book worth £420 million, the company should perform well this year, while overseas diversification should help soften any squeeze on public sector education spending. Surprisingly for an IT company, the shares offer a yield of almost 4%.

This article was originally published in Money Observer - Moneywise's sister publication - in November 2009

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