Investment Column: Imperial offers something to hold

No sign of a downturn at European Motor Holdings; Numis well-placed for market improvement
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The Independent Online

Investors have proved over the past year that they are still addicted to Imperial Tobacco, the cigarette company behind Lambert & Butler. Its shares have risen 20 per cent.

The company yesterday delivered another solid set of results, saying first-half profits were up 20 per cent. But although Imperial is still gaining market share in Western Europe, this is a declining market as consumers become more health conscious. Governments are also imposing ever heavier tax duties, which have had a particularly bad effect on Imperial's German operations. The real areas of growth for Imperial are Eastern Europe, Africa and Asia where there are plenty of new customers to hook up.

Smoking bans in public places may affect Imperial, although it says there is no evidence to show that these result in a drop in sales. In the next breath, though, the group warns that the bans have introduced an element of seasonality into the tobacco sector, which is usually seen as a non-cyclical, defensive stock. With smokers forced to go outside to light up, sales pick up in times of warmer weather.

The company also throws off plenty of cash and may soon return some to shareholders. Its vigorous cost cutting programme is being stepped up, and it now plans to take out £250m of costs by 2005.

For the investor with a conscience, Imperial is at last making some noises about becoming more socially responsible. Child labour, environmental damage and smuggling are all allegations laid at the door of tobacco companies, but Imperial has now acknowledged these are issues to address.

At 1,260p, it is trading at about 12.5 times 2004 earnings and offers a 3.7 per cent dividend yield. It is not the obvious bargain it was when we said buy in November. It is, however, a solid, well-run business with growth forecasts of about 10 per cent over the next two years. While its products might not be good for your health, Imperial's shares shouldn't do you any harm. Hold.

No sign of a downturn at European Motor Holdings

European Motor Holdings is a company purring like a well-oiled engine. The group runs 40 franchises from 35 car showrooms across the UK, representing most major prestige vehicle manufacturers. Its results yesterday motored past the City's forecasts, and the company is justified to boast that it is one of the UK's most profitable motor retailers.

Profits for the year to 29 February were up 27 per cent to £16.8m on turnover up 14 per cent. New car sales in the UK were at record levels last year, fuelled by low interest rates, competitive prices and new prestige model launches by Jaguar, BMW and Audi - all stalwarts of the EMH portfolio. EMH is still expanding, too, with new arrangements to sell Minis to the North of England, and talks to broaden its relationship with Audi.

The current financial year has begun with record sales for March, but rising interest rates are the key threat to the benign outlook which was being described yesterday. As well as making car finance more expensive, it could also knock consumer confidence more generally. Until there is evidence of a downturn, though, it will be premature to take profits from EMH's strong run. Hold.

Numis well-placed for market improvement

Numis could not have had better timing, when it formed in 2000, to focus on offering research and investment banking services to small and medium sized companies.

As the mega investment banks have retrenched away from the sector in the past four years, Numis has been one of the most successful smaller players to swoop in to take their place. It has also been able to pick up some heavy hitters to join the team, people who have been cut loose from larger institutions.

Born out of the insurance-focused broker, Raphael Zorn Hemsley, Numis has grown from covering just four sectors to 12. Profits soared by 120 per cent to £11.2m in the six months to 31 March, on an 84 per cent increase in turnover.

Numis' rapidly increasing profile has not always been a positive. Recently, the broker was criticised when it snapped up the business publisher Centaur despite the fact that it acted as adviser to another company, Incisive Media, which was also bidding.

In a business where loyalty to clients is very highly valued, the episode has not helped Numis. However, its chief executive, Oliver Hemsley, said yesterday the company had learned from its mistakes. Numis is also chaired by Michael Spencer, the chief executive of the broker ICAP, who can be relied on to steer the business adroitly.

Numis - one of The Independent's share tips for 2004 - saw its shares rise 12.5p to 702.5p yesterday. They have gained 28 per cent since this column first tipped them in November. The company is well placed to take further advantage of improving markets. Buy.