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Imperial considers logistics spin-off

After reporting mixed results for its first quarter, Imperial Tobacco is considering a possible flotation of its logistics unit
February 18, 2014

What's new:

• Logistics unit could be floated

• Mixed first-quarter performance

• Tasty dividend yield

IC TIP: Buy at 2,377p

Cigarettes giant Imperial Tobacco (IMT) certainly isn't immune to the challenges facing its industry - these include advertising bans, more hostile regulation in developing markets or a tendency for consumers in developed economies to trade down. Indeed, first-quarter reported revenue fell 6 per cent and the group has confirmed that it's reviewing its options regarding a possible IPO of its European logistics business, Logista. That was originally acquired as part of the £11bn takeover of Spain's Altadis in 2008.

Even after stripping-out the impact of a supply chain overhaul, Imperial's underlying revenue increased just 1 per cent in the first quarter. True, the company's growth markets - which includes the US and selected European countries - did improve revenues and volumes here rose 8 per cent in the period. Similarly, six out of 10 growth brands also witnessed volume increases. But, in line with industry trends and reflecting weak demand, total volumes fell 5 per cent during the first quarter. Although management insists that a strong pricing and product mix strategy helped to offset the volume declines, leading to improved market share and profitability in the US.

At the time of the Altadis deal, the logistics unit was valued at about £1.7bn. The business supplies markets including Spain and France and it generated £176m of the group's £3.2bn operating profit in 2013. Management has said that there is no certainty regarding the outcome of its review into whether to the float the business.

Panmure Gordon says…

Hold. Imperial's first-quarter underlying revenue growth was broadly in line with expectations. The group's shares, however, have fallen 4 per cent in the year to date, underperforming the UK market by 3 per cent. They currently trade on a PE ratio of about 10 times, and a 9.1 times enterprise value to cash profits multiple. We view that valuation as undemanding but, set against the weak volume backdrop - particularly in Europe - and the limited full-year 2014 earnings growth, we feel the shares look fair value. We maintain our hold recommendation and our 2,300p price target. We have reduced both our 2014 and 2015 EPS estimates by around 1 per cent to 213p (from 210p in 2013) and 224.8p, respectively.

Oriel Securities says…

Buy. Volumes declines look in line with expectations, although Imperial's first-quarter figures include an adjusted number - this excludes any impact from its stock optimisation programme. But the extent of that de-stocking programme was confirmed by a reported volume decline which was 11 per cent in the quarter. That appears to exceed consensus expectations for a high single-digit decline. Still, Imperial's valuation remains at a significant discount to that of its large-cap UK consumer goods peers, while the dividend is notably high at 6 per cent. We expect adjusted pre-tax profit of £2.7bn for 2014, in line with the £2.6bn generated last year, with EPS of 217.1p.