Investment Column: Imperial Tobacco tipped as a safe haven

Ricardo; Energybuild
  • @AlistairDawber

Our view: Buy

Share price: 1818p (+60p)

Investors searching for a company to add a little spark to their portfolios might well be having a long look at the cigarette-maker Imperial Tobacco, which put out a steady-as-she-goes trading update yesterday.

The usual health warnings apply: Imperial makes products that kill people and its biggest growth area is the Middle East, where it is not compelled to go to the lengths it has to in Europe to caution customers about the dangers of smoking. However, for investors who consider such issues a mere smokescreen, Imperial is a compelling option.

Not surprisingly, the group said that it expected its full-year earnings to hit targets. More importantly, perhaps, was the bullish update on its integration with the Franco-Spanish tobacco giant Altadis, for which it paid $11.3bn last year. Consultation on jobs in France will be concluded by November.

The tobacco industry has largely escaped the equity market terrors of the past few months, so investors can assume it is a safe haven. On the flip side, they can also assume that stocks in the sector are pretty pricy.

But this is another reason to buy into Imperial. According to its own broker, Morgan Stanley, the shares look good compared to others. "Imperial Tobacco has gained about 8 per cent in the last week in a very volatile market, but is still trading at only 10.5 times 2009 [price earnings ratio], while offering in excess of 16 per cent earning per share compound annual growth rate and close to 5 per cent dividend yield. The stock looks cheap relative to global tobacco and consumer staples peers (British American Tobacco is on 13 times 2009 P/E)."

With share prices bombing, investors need safe places for their cash apart from under the mattress. Imperial is one such place and buyers should get in now before the discount to others in the sector disappears. Buy.


Our view: Buy

Share price: 304.75 (+5.75p)

Investors should always take a second look at companies that perform better than the experts predict. The engineering consultancy Ricardo, which advises Ford, Toyota and Formula One teams on fuel efficiency, did just that yesterday when it announced forecast-busting full-year results, with a 20 per cent increase in pre-tax profits and an order book ahead of where it was this time last year.

The group stressed that it was not directly subject to credit crunch worries – its stock has outperformed the FTSE 250 by 20 per cent this year – and argued that it had deliberately expanded overseas and added as many clients as possible to mitigate risks. Its biggest customer now accounts for just 12 per cent of revenues. Investors may think this is all too good to be true, especially as much of Ricardo's work comes from companies trying to keep up with environmental legislation.

Ricardo's shares are costly and even analysts at Royal Bank of Scotland admit: "The rating can no longer be described at cheap in today's de-rated market." The shares rose by 2 per cent yesterday, lending weight to RBS's other observation that "Ricardo is a unique play on technical solutions to reduce emissions and improve fuel efficiency – both highly topical themes and strong growth drivers". The stock will grow to 365p, its highest point in the last 12 months, the RBS experts added.

Investors should not necessarily jump at shares on the back of good results, especially when there are few obvious indicators of how the shares will grow. However, Ricardo is likely to be a safe bet in times of turbulence and some will be happy with that for the time being. Buy.


Our view: Buy

Share price: 22p (+2.5p)

Here is a story to warm the cockles of every Welshman's heart: coal mining in the principality is thriving. Yes, you read it correctly, coal coal mining is flourishing – at least if Energybuild's full-year results, published yesterday, are anything to go by.

The Neath-based group posted a pre-tax profit of £954,000, an improvement on last year's loss, and the stock jumped by 12.8 per cent after the announcement. It is true that burning coal for power is one of the worst ways you can pollute the environment but, for investors without such qualms, the group could well be a banker.

The Government is increasingly keen on securing Britain's energy supplies and coal is the cheapest and most plentiful way of doing it, which cannot be bad for Energybuild and its investors.

Analysts at house broker Panmure Gordon are keen: they argue that the next year is an "exciting" time for the company. They suggest that its net profit will rise to £3.5m and its share price will leap to 41p, just about double yesterday's opening level.

There are more established coal groups such as UK Coal and AHT, both of which are bigger and therefore safer. However, the sector is on the up and with production targets of 750,000 tonnes by 2011, Energybuild is a decent bet for those looking for a growth story. Buy.