The Investment Column: Smoking bans mean it's time to kick the habit of buying Gallaher

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The Independent Online

But concerted public health campaigns across Western Europe are finally starting to work and yesterday the group said profits for the first six months of the year fell 4 per cent to £225m. Tax rises and advertising bans are having an effect and sales of cigarettes are stalling as it becomes an increasingly expensive and socially unacceptable habit.

So Gallaher and others have had to find new populations of potential addicts on which to push their brands. The big prize is the former Soviet bloc, where the break-up of former state monopolies has opened up millions of smokers to Western tobacco companies.

Gallaher said yesterday volumes for the group were up 3.5 per cent to 82 billion cigarettes, but this growth was almost entirely down to emerging markets such as the Commonwealth of Independent States (Ukraine, Russia and Kazakhstan) and the rest of the world. Here, profits rose 55 per cent on an 11 per cent rise in volumes.

These are impressive headline figures, but still represent a fraction of the company's business. In the UK, for example, volumes were down 8 per cent. Gallaher is also losing its share of the premium market as tax increases force smokers to trade down to cheaper cigarette brands. The move to lower-priced cigarettes puts more pressure on the company's cost base, which has already been substantially thinned out.

As of next year, the UK market is set to become even more challenging, when pubs in Scotland ban smoking. By 2008, pubs serving food in England and Wales will have to ban smoking. Smoking bans are marching across Europe and in Austria, Germany, Italy, Greece, Benelux and Spain, Gallaher is already witnessing "substantial" market declines.

Gallaher gets about 80 per cent of its business from Western Europe, with its key markets the UK, Sweden and Austria. For investors unconcerned about investing in tobacco companies, there are others that have a geographical spread more favourable for shareholder returns.

The shares are valued at about 14 times 2005 earnings and its dividend, with a yield of less than 4 per cent, does not compensate for Gallaher's dependence on the shrinking Western European markets. Follow doctors' orders on Gallaher shares - quit.

US expansion hopes strengthen Beazley

Beazley has been one of the lower-profile Lloyd's of London insurers over the past year, staying out of the headlines by generating steady growth, and avoiding the attention its peers have garnered after a spell of bid approaches.

Reporting its interim results yesterday, Beazley revealed a 42 per cent rise in profits which, while not as sensational as some of its competitors, demonstrated the company has been able to flourish at a tough stage in the cycle.

With its exposure to Hurricane Katrina expected to be just £20m, the insurer is confident that even a series of further hurricanes will not ruin another good year for the group, and should even help to prop up premiums.

The real excitement in Beazley lies in what may be around the corner. Having completed its acquisition of Omaha Property & Casualty Insurance early this year, the group has licences to trade in 50 US states, opening up a string of opportunities for expansion.

Perhaps the strongest indication of how Beazley is regarded by its investors - who include the likes of Fidelity's Anthony Bolton - was its £105m rights issue last year, which was fully subscribed, and barely knocked the company's share price.

Trading at a little less than 10 times this year's earnings, Beazley is one of the more expensive Lloyd's insurers. But with strong management, an increasingly attractive dividend and encouraging potential in the US, such a price would appear to be justified. Buy.

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