Investment Column: Imperial caught in a political wind

Imperial Tobacco, Britain's second-biggest cigarette group, is faced with a barrage of problems which would cause most companies to blanch.

Yesterday's announcement that the Government is set to outlaw tobacco advertising is a straw which gives a strong clue to the way the political wind is blowing. Tobacco duty, already raised 15p by the Tories in November, looks set to be a prime target of a Labour government seeking ways to raise money without increasing income tax in its forthcoming Budget.

And it is not just the UK where Imps faces political difficulties. The French government, facing stringent Maastricht criteria for European monetary union, has attempted to protect its revenues by preventing tobacco companies from cutting prices to match Rothmans, whose cut-price brand has scooped 6 per cent of the market.

Given the difficult environment, it is testimony to the management that Imperial has produced a highly respectable set of results for its first period since the demerger from the Hanson conglomerate in October. Pre- tax profits fell from pounds 174m to pounds 143m in the six months to March, but that was all to do with the need to pay a pounds 40m interest bill to outside lenders for the first time. Underlying operating profits were actually up 5.2 per cent to pounds 183m.

The UK market, still Imperial's biggest, continues its gentle decline, with increased pressure on smokers to "downtrade" to cheaper brands. Although this hits the company's mid-market brands, such as Embassy and John Player Special, it boosts the value-for-money end of the sector where Imps, with its Lambert & Butler product, is relatively stronger than arch-rival Gallaher.

But the real hope for growth comes from overseas. Excluding the Rizla cigarette papers business acquired for pounds 185m in January, non-UK profits rose pounds 2m to pounds 34m in the period.

The shares, up 2p at 403.5p, stand on a lowly forward p/e of 10 on Barclays de Zoete Wedd's forecast of pounds 310m profits for this year.

As well as politics, the shadow of litigation is starting to move across Imperial from the other side of the Atlantic. The shares are cheap, but progress from here is unpredictable, given the external factors, and choice in the sector is about to be expanded with Gallaher due to publish its flotation details tomorrow. Hold.