The Investment Column: Hold BAT despite the dark clouds

Borrowing frenzy is a boon for Hitachi Capital - Exel delivers fair value as it integrates T&B
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The Independent Online

Shares in British American Tobacco, the cigarette manufacturer behind the Dunhill, Lucky Strike and Pall Mall brands, would have lit up any investorÿs portfolio. If you bought shares at the turn of the millennium, you have made a capital gain of 132 per cent and harvested another 42 per cent in dividends. Not bad for an industry in terminal decline.

Shares in British American Tobacco, the cigarette manufacturer behind the Dunhill, Lucky Strike and Pall Mall brands, would have lit up any investorÿs portfolio. If you bought shares at the turn of the millennium, you have made a capital gain of 132 per cent and harvested another 42 per cent in dividends. Not bad for an industry in terminal decline.

Because its customers are all addicted, there is a fairly predictable amount of cash coming into the company. As well as those chunky dividends, it has funded share buy-backs, with plenty left over for vital acquisitions. These have been both deals in newly deregulated markets in the Far East and Africa and in the West, where it can make big cost savings from crunching companies together.

So thatÿs the strategy. Growth abroad. Cost savings closer to home. The question is always whether these two together can offset the financial pain caused as the developed world slowly kicks the smoking habit. Yesterdayÿs results, for the nine months to 30 September, suggest on first glance that the two are in balance. Two of the companyÿs four most exciting brands actually lost sales this year, while operating profits, before one-offs and write-downs, were up just 1 per cent to £2.138bn. But strip out the effects of sterlingÿs strength against most major currencies and the operating profit growth would have been closer to 7 per cent.

Trading in Canada is the latest nightmare spot: a jump in excise duty has pushed people to lower-cost cigarette brands, where BAT is weak in that country. Malaysia, where taxes have just gone up, could be next yearÿs nightmare. But Russia is a growth area, where sales are up 15 per cent so far this year as the locals trade up to posh Western brands.

BATÿs newly merged US operations, in which it keeps a 42 per cent stake, are subject to the Justice Departmentÿs $280bn (£153bn) lawsuit against the industry for Ã’ill-gotten gainsÓ, the darkest cloud hanging over BAT next year. But the 5.2 per cent dividend yield should help you sleep. Hold.

Borrowing frenzy is a boon for Hitachi Capital

Hitachi Capital has been making the most out of debt-crazy Britain over the past two years, luring in ever more consumers with its Ã’buy now, pay laterÓ deals, which it provides for retailers such as DFS Furniture. While UK consumer debt levels are now in excess of £1 trillion, there seems to be no end to peopleÿs appetite to borrow even more.

There must be an end to the debt boom, but Hitachi believes there are hundreds of retail industries it can break into, and which are crying out for credit providers. So, alongside a 33 per cent rise in interim profits, it yesterday announced strategies to sustain its remarkably high growth rate. Caravans, for example, its next target, could provide up to £1.3bn of business. Health care and home development are two other areas with room for fast growth.

When we looked at this stock 18 months ago, it was trading at about 140p - and it is 227.5p now. Still trading on just 11 times this yearÿs earnings - cheap for the sector - Hitachi Capital is a buy.

Exel delivers fair value as it integrates T&B

Exelÿs £328m acquisition of the rival supply chain manager Tibbett & Britain back in the summer is already yielding more cost savings than expected (originally up to £20m a year) thanks to things like closing T&Bÿs head office and integrating the managements. It is a shame that Exel couldnÿt be a little more effusive about the trading at T&B: it was able to say yesterday only that there has been a Ã’generally positiveÓ reaction from customers (for which the market read some were abandoning their contracts) and that trading in South Africa and Mexico has been outright disappointing.

But it is early days for an acquisition that could, in the hands of Exelÿs respected management, yield substantial profit improvements at what was a poorly run business.

What Exel means by supply chain management is making sure that customers such as Marks & Spencer get supplied with all the goods they need at the time they want them - transporting, warehousing and tracking the produce on the customerÿs behalf.

It is a business crucially dependent on global trade and its shares have been volatile and generally disappointing this year as economists debate the likelihood of slowing growth next year. Meanwhile, the dollar, in which Exel makes much of its profit, has continued to slide and it has struggled to pass on the rising cost of fuel to its customers.

None the less, the company confirmed it would meet market forecasts and 702.5p, with a dividend yield of 3.7 per cent, is a fair price for the shares.

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