China syndrome healthy for Imperial Tobacco

Still too early to buy Torotrak even after two and a half years; Probably best to steer clear of feuding Cayzers at Caledonia
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The Independent Online

Imperial Tobacco has just taken a couple more of those vital steps away from the Western world (where governments do their darnedest to stop people buying its product) to the developing world where the marketing muscle of the global tobacco giants should be able to lure an untapped army of smokers on to aspirational Western brands.

The company has hooked up with the Chinese state monopoly, which will produce and help sell Imperial's West brand of cigarettes. Some 1.7 trillion cigarettes a year are smoked in China so it is important to be in among the pioneers as the country opens up. Imperial is also building a giant factory in Turkey, where a more modest, but still mind-boggling, 100 billion cigarettes are consumed every year.

So the company, which is also growing its presence in Russia, is set fair for the long term. In the more immediate future, a giant programme of cost savings is doing wonders for the bottom line. This was made possible by the £2.4bn acquisition last year of Germany's Reemtsma. Imperial yesterday upped the likely annual value of the cost savings from £170m to £210m, and the contribution from Reemtsma lifted pre-tax profits in the year ended 30 September by 55 per cent to £656m.

Challenges aplenty, though. Imperial is the company behind the Lambert & Butler, and Richmond brands. In the UK, where it is market leader, it lost sales as people were allowed to bring more fags from Continental Europe, but this seems to have stabilised. In Germany, the government has finally discovered tobacco as a tax cow to be milked, but Imperial at least has the consolation of leading the roll-your-own market, to which some smokers are driven.

Even with a costly German marketing push, Imperial is still likely to produce a 4.5 per cent dividend yield next year. Since demerging from Hanson in 1996, Imperial has grown dividends by an average of 15 per cent a year. For those with no qualms about buying into an industry that is barred from many ethical investment portfolios, its shares are as attractive as ever.

Still too early to buy Torotrak even after two and a half years

It is about two and a half years since this column last looked at Torotrak, what with speculative technology developers being out of vogue until recently. We've not missed much.

The loss-making company's Infinitely Variable Transmission (IVT) system is a gear system for automatic cars that adjusts to the most efficient level, improving fuel efficiency by a fifth and making for a less clunky drive. IVT has captivated plenty of small punters, who provide a dedicated following for Torotrak shares which, at 75.5p, are up fivefold since March. It has attracted less interest among major car manufacturers. Toyota and General Motors have both walked away from work on the technology.

Torotrak and its enthusiastic chief executive, Dick Elsy, now believe the most likely route to market is via specialist gearbox manufacturers, and that is certainly a more realistic approach. Indeed, recent months have shown tangible signs of progress, since some manufacturers, having licensed IVT, have been talking up the product at motor shows. Mr Elsy has promised a major car maker will be designing cars using IVT by the end of next year.

Maybe, but even after work to advance the technology in the past couple of years, it remains for anyone to put their money where Mr Elsy's mouth is and investors need to proceed with extreme caution.

Torotrak reckons it needs 1 per cent of the world's automatic car market to use IVT for it to break even. But, even if the first cars really roll off the production line in 2007, it is unlikely licence payments will have been enough to tide the company over until then.

It was too early to buy the shares in May 2001, and it is still too early now.

Probably best to steer clear of feuding Cayzers at Caledonia

It has been a choppy time on the high seas at Caledonia Investments, the investment trust in which the Cayzer shipping dynasty holds a substantial stake.

Tim Ingram, the chief executive of Caledonia, has been involved in a series of skirmishes, most recently battling to stop an attempt by rebel clan members to wind up Caledonia all together.

Despite the distractions, the underlying business, which invests in UK equities, has turned in a respectable performance and major holdings such as Icap and Close Brothers have done well. Caledonia saw its net asset value (NAV) increase by just over a quarter to 1,161p in the six months to 30 September. The shares' discount to NAV has narrowed from 30 per cent to 21 per cent in the hope that the wind-up plan - voted down - would concentrate minds on shareholder value. Up more than 40 per cent since March, the shares were yesterday off a penny at 940p.

The Cayzers own almost 50 per cent of Caledonia so investing in the trust means throwing in one's lot with that of a super-rich clan. While in some circumstances that can be a wise thing for the small investor, there is no cohesive Cazyer family view on the trust's future. If the rebels had held sway, it would have been wound up at the bottom of a bear market just to generate a bit of cash for some big shareholders. Since the trust will forever be at the mercy of a potentially feuding clan, there is no clear idea of where it may be taken.

Look elsewhere.