The Investment Column: Imperial is one to avoid as big tobacco runs out of puff

New title options and healthy job ads do it for Centaur; Psion's cash pile means that it's still a good bet
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The Independent Online

Thanks to a ban on advertising, and punitive tax measures, the market for cigarettes in the UK and across most of Western Europe is in decline.

But with leading brands such as Regal, Embassy and Lambert & Butler in its box, Imperial Tobacco has held on to its position as the smoke of choice for millions of addicts. In an update before its full-year results, the company yesterday said the UK market had dropped 4 per cent, but added that it had maintained its market share.

While the appetite for cigarettes falls inexorably, Imperial and others have been searching for new means of delivering nicotine. Smokeless tobacco is seen as a much less harmful product and yesterday Imperial said it was buying a Swedish smokeless tobacco company, Skruf. It produces "snus", a small wet teabag of tobacco that is placed in the mouth. "Snus" is banned in EU countries, however, except for Sweden, and at present there is little sign of this changing. Still, there is potential to export snus elsewhere in the world.

Imperial also hopes to start selling its own cigarettes through Skruf, although the Swedish cigarette market is in sharp decline. Nor is there much hope of a bigger acquisition in the sector. Consolidation is one of the few hopes for growth, but tobacco stocks are not cheap these days.

Smoking bans are gathering momentum in Europe, with one in enclosed public spaces starting next year in Scotland and a ban on smoking in pubs that serve food beginning in England and Wales in 2008.

Further tax rises are also on the horizon in Germany, where volumes have already been hit through excise rises. An imminent European court ruling could bump up the tax rate on individually sold cigarettes to the same rate as packets. "Singles" have been a major growth area as packets have become so expensive for many.

With no breakthrough in emerging markets such as Eastern Europe or China, the company is dragging on fag ends of a dying market. Share buy-backs will always prop up earnings, but at 14 times earnings and its wheezy 3.5 per cent dividend yield, the shares are running out of air. Avoid.

New title options and healthy job ads do it for Centaur

Regional newspaper publishers are having to cope with plummeting levels of recruitment advertising but Centaur, the business-to-business publisher, had the opposite story to tell yesterday. Job ads shot up 16 per cent for the year ended June 2005. It just goes to show the different dynamics that operate in consumer and business-to-business media.

Centaur puts out trade magazines, such as Marketing Week, The Lawyer and Money Marketing, and associated trade shows. So it is exposed to highly specialised business cycles such as the level of demand for lawyers. While general recruitment ads are on the decline and advertising generally is patchy across media, Centaur was able to report an 8 per cent rise in ad turnover.

Adjusted pre-tax profit climbed 60 per cent in the period to £10.2m, as margins improved to 17 per cent from 13 per cent. Turnover grew 6 per cent to £72.2m.

Centaur points out that core revenues at its magazines were £10.9m higher in the peak year of 2001, so there is plenty more potential juice out there, if the ad market continues to recover.

Acquisitions are tricky because of the level of competition for assets, but the company continues to launch new magazines.

Centaur shares, at 84p, trade on a slight discount to peers such as Incisive Media and Metal Bulletin. Buy.

Psion's cash pile means that it's still a good bet

We advised readers to buy shares in Psion, the mobile computers business, in March 2004 when the price was the equivalent of 184.5p, a price which adjusts for the share consolidation that the company subsequently undertook.

A decent set of half-yearly results for the six months to 30 June published yesterday helped push the shares back up to 164p after some recent weakness. Add back the 20p-a-share investors are getting from the sale of Psion's stake in Symbian, the maker of mobile phone operating systems, plus the 2.8p-a-share announced in dividends and investors are just about in the money.

The distraction of the Symbian sale is behind the company which is focusing all efforts on its Teklogix business that supplies hand-held computers to industries where workers use them to input data on the move.

Applications in this market are getting more sophisticated and Psion's products are market leaders. Sales were up 24.6 per cent on the first half of 2004 and pre-tax profits have soared from £2.5m to £7.3m. There is plenty of cash for acquisitions such as the recent highly successful deal to buy Symagery Microsystems. Psion is still worth buying.

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