Underlying profits edged up 4.2 per cent to pounds 390m, but higher interest payments cut pre-tax figures from pounds 337m to pounds 318m.
Peter Wilson, chairman and chief executive, said the number of smokers in the UK had risen by half a million due to cheap imports, but the "legitimate" market had fallen by 8 per cent. Bootleg cigarettes led to a 4.7 per cent fall in Gallaher's cigarette sales in the UK, which account for 85 per cent of total sales. Its share of the market slipped from 39.6 per cent to 36 per cent.
This is the Gallaher conundrum; it is heavily reliant on the UK but this market is shrinking. It is trying to expand its international operations, but those too seem to have run out of puff. Germany is difficult, Russian profits have evaporated and France is highly competitive.
Management is right to avoid spreading itself too thinly, but it must be a worry that it has so little presence in the cigarette "hot spots" of the Far East and South America. Managers are looking at "niche" opportunities in the Asia-Pacific region.
On the plus side, UK margins jumped from 42.7 per cent to 46.2 per cent as price rises countered the cheaper rivals and costs were held.
On HSBC current-year forecasts of pounds 335m, the shares - down 2.75p to 447.5p yesterday - trade on a forward multiple of 13, a big discount to the market. HSBC and Charterhouse Tilney, rating the shares at "outperform", believe this will narrow.