BAT strategy runs out of puff

De Vere; Expro

British American Tobacco, owner of the Lucky Strike and Rothmans brands, was sending up smoke signals on its future financial performance yesterday – and investors read them as bad news.

The company was warning that a new anti-smuggling policy, designed to ingratiate itself with the politicians who levy cigarette duty, will hit sales in 2002. BAT is to stop selling to distributors it thinks are supplying contraband fags and will not supply wholesalers with more than BAT thinks they can sell. That means volumes will fall up to 3 per cent next year.

It also raised other worries: governments may be tempted into tax rises on smokers as the public finances falter, and the general economic gloom, particularly in emerging markets, is pushing smokers to cheaper brands. Add to that the scepticism of some observers who reckon most of the recent growth has come from squeezing cost savings out of the mega-mergers with Rothmans and Brown & Williamson, and the shares fell 17.5p to 561p.

Luckily, thanks to low interest rates and taxes and other benefits further down the profit and loss account, BAT was able to title yesterday's statement "Confirmation of Earnings Estimates".

Valued on a multiple of earnings before interest, tax and write-offs, BAT trades at a 30 per cent discount to the rest of the European tobacco sector, according to estimates from Morgan Stanley. This discount may no longer be justifiable – the legal actions in the US that have dogged the company are, one by one, falling away, and the Republican administration is more sympathetic to the industry – but it does not have to be that the discount is narrowed by BAT shares rising.

With the professional investment community seemingly hell-bent on generating a stock market rally, economically defensive stocks such as BAT are unlikely to be favoured. The cautious investor would be wise to take profits.

De Vere

DE VERE Group, the hotels and health clubs operator, has had anything but a leisurely year. It was all geared up to host the Ryder Cup golf tournament at The Belfry in late September but suffered a major set-back when the event was cancelled following the 11 September terrorist attacks. It had hoisted the "For Sale" sign over its Greens health clubs division just days before the attacks and had to hurriedly take it down again afterwards. Faced with an empty Belfry for a week and an evaporating tourist market, Paul Dermody, De Vere's chief executive, must have felt well and truly bunkered.

But a better than expected set of full-year results yesterday showed decent form. The headline £18m loss was due largely to £49m of exceptional charges related to the sale of its Tavern drinks wholesaling business. There was also a £1.2m charge for the lost Ryder Cup which has been pushed back to next year.

But the 7 per cent rise in operating profits to £49.7m cheered the City, as did a relatively upbeat trading statement. In the first nine weeks of the current financial year revenue per available room, the key benchmark in the hotels sector, increased by 1.1 per cent in the main De Vere hotels and 2.3 per cent in the mid-market Village chain. Indeed De Vere is better placed than some rivals in that it is a mainly provincial operator with little reliance on the tourist market.

Assuming full-year forecasts of around £34m, the shares – up 2p to 287p yesterday – trade on a forward price-earnings multiple of 12. A decent hold.

Expro

RUSSIA'S ACTION to cut oil production had the desired effect on the price of crude yesterday, but it looks as if the recent period of tight Opec-led control over the oil price has come to an end. For that reason, and that reason only, shares in Expro International languish at an 18-month low of 387.5p.

Expro provides production services to the big oil and gas companies, helping to improve efficiency and hiring out technical expertise in deep-sea drilling. The theory is that lower oil and gas prices will force production companies to rethink the viability of some projects, leaving Expro with less work to do.

It has happened before, in 1998, when the oil price plunged to $10-a-barrel and Expro's earnings fell something like 28 per cent. Sure, the oil companies saw much worse damage inflicted on their bottom lines, but the market treated Expro shares just as savagely.

The group posted pre-tax profits of £8.1m for the half-year to September, up 51 per cent. It is heading for 33 per cent earnings growth this year as the oil giants rush to meet ambitious production targets. Expro's order book remains strong, up 20 per cent in the past six months, but with the oil price still vulnerable, there will be a better time to buy the shares.