Investment Column: Sentiment the key to Gallaher

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Tobacco share prices have little to do with profits these days. Sentiment is the key. Shares in Gallaher, demerged from American Brands and floated at 283p in June, have underperformed the market by 16 per cent since then. Part of the reason is a lack of liquidity in the shares - some 75 per cent are still held by US investors who see Gallaher as low risk.

But yesterday's strong maiden interims added only 4p to the share price, which closed at 273p. The growing threat of litigation in the UK, where Gallaher and Imperial Tobacco have around 80 per cent of the market, remains a negative.So, too, are Labour's manifesto pledges to ban tobacco advertising and cut sports sponsorship.

In reality, none of these poses a serious threat to Gallaher. The group's Benson & Hedges and Silk Cut brands have some of the best instant recognition rates and would survive without advertising.

The group is also striking more international sponsorship deals and pushing international expansion hard, particularly in eastern Europe and the Far East.

On SBC Warburg profit forecasts, Gallaher on 8.7 times 1997 pro forma earnings looks cheap next to Imperial on 9.3 times. However, with the US situation still uncertain and the likelihood of group legal action in the UK, sentiment is likely to remain negative for the next few months.