Imperial smokes out more profits as it puts up prices

Successful price hikes across its range helped Imperial Tobacco produce a strong rise in revenues in the final quarter of its financial year despite a drop in the volume of cigarettes and rolling tobacco it sold.

The firm has already been struggling to cope with lower demand and smokers moving to cheaper brands in Southern Europe, and particularly Spain and Portugal, as consumers have been hit in the pocket by the eurozone crisis.

Now it faces a new challenge in Poland, one of its core East Europe markets. A loophole in the country's laws allows farmers to grow tobacco and sell unprocessed leaves without any tax direct to consumers who then dry and shred them to make handrolling tobacco. Imperial reckons that non-duty paid rolling tobacco like this now accounts for 60 per cent of the Polish market.

In the Ukraine counterfeit cigarettes have soared in popularity, weakening demand in the legitimate market. Poland and the Ukraine account for some 15 per cent of Imperial's volumes.

In the latest quarter volume sales fell 3 per cent thanks mainly to those two countries but also the ongoing trade sanctions against Syria where Imperial's Gauloises was the top-selling brand. But thanks to its price rises Imperial's revenues rose by 4 per cent in the three months which end on 30 September. It said it saw particularly good growth in Africa and the Middle East and the Asia-Pacific region. In terms of brands Davidoff, Gauloises Blondes, West and JPS all outperformed the market in revenue and volume growth. Imperial shares rose 63p to 2,399p. Panmure Gordon's Damian McNeela rates them a buy, with a price target of 2,900p.