Investment Column: Investors will see little spark from BAT

Fenner; Bodycote
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The Independent Online

Our view: Sell

Share price: 2,107.5p (-32.5p)

British American Tobacco (BAT) signalled that consumers continue to cut back on smoking cigarettes globally, despite the recession drawing to a close in many of its markets.

The maker of Dunhill and Pall Mall said that volumes of cigarettes fell by 1 per cent to 168 billion across the group for the three months to 31 March, but this was down by 4 per cent, excluding recent acquisitions.

Paul Adams, the chief executive of BAT, said: "Our consumers are clearly finding economic conditions difficult and volumes suffered as a result of market size declines." The company, which also makes the Lucky Strike and Kent brands, cited lower volumes in the important markets of Japan, Brazil, Russia, Romania and Turkey. Of its value, mid-tier and premium ranges, BAT suffered the biggest fall in volumes of 7 per cent on its lowest-price cigarettes. It attributed this, in part, to "downtrading to illicit trade" in the low-price segment, particularly in central and eastern Europe.

Despite rising levels of unemployment and increased excise duties, its mid-tier and premium brands, such as Dunhill and Lucky Stripe, fared better with volumes down by a less severe 1 per cent and 4 per cent, respectively.

However, BAT was able to offset declining volumes and deliver "solid revenue growth" from pushing through strong price rises and its acquisition of PT Bentoel in Indonesia in June last year. It also benefited from favourable movement in exchange rates over the quarter.

The price hikes further bolster the age-old argument about tobacco companies being reliable defensive stocks in a recession, as addicted smokers are always willing to fork out for fags.

But with world economies emerging out of recession investors may want to inhale on the idea that better investment opportunities could lie away from the tobacco industry.

In particular, it is worth noting that BAT's share trade on a 2011 price-earnings ratio of 11.1, which is at a premium to rival Imperial Tobacco. Therefore, despite the expectation that BAT will continue to grow revenues, we think it is time to look for less expensive share habits. Sell.


Our view: Buy

Share price: 210p (-15.8p)

Rubber belts may not necessarily set hearts and pulses racing, but investors in Fenner, a belt maker, have had a gay old time in the past 12 months, with the shares putting on a remarkable 369 per cent.

The group said yesterday that it is to ask backers for nearly £40m to spend on acquisitions, and while the market did not take kindly to the news, with the shares dipping by 7 per cent, we reckon the move indicates inherent strength: investors should be pleased that their money is not being spent on so-called balance sheet repairs.

As well as announcing plans to tap investors, Fenner said that pre-tax profits were up 35 per cent in the first half – for those investors that might not take favourably to being asked for more money, the group also increased the interim dividend by 9 per cent to 2.4p a share.

Despite the market's reaction yesterday, Fenner is undoubtedly in good shape. The question for potential backers is whether they have missed the boat already.

The experts at Numis argue not, pointing out that the shares trade on a 2011 price-earnings ratio of 10.8 times, yielding 3.3 per cent.

We reckon the big gains have already been made in terms of Fenner's share price – we cannot see another 369 per cent jump over the coming year – but still expect upward momentum, while the dividend yield is also decent, making the company worth a punt. Buy.


Our view: Hold

Share price: 226p (-5.1p)

Bodycote, the engineering group, was slightly behind yesterday after saying that, if demand holds up, full-year profits were likely to come in at the upper end of market hopes.

Though the day's performance must have been coloured by the weakness of sentiment across the stock market here and elsewhere, some also pinned the lack of response in the share price to recent run of strength – Bodycote is up over 30 per cent since the beginning of the year – and the note of caution in the company's outlook statement.

So, is the upswing behind us? We think the case is evenly balanced. Bodycote's comment that the "pace of recovery remains uncertain and possibly uneven, particularly for the second half of the year" was hardly revelatory. Save for the arch bulls and the habitually glum prophets of doom, that view is shared by economists of every stripe. The company was simply hedging its bets and we don't think that's enough of a reason to sell. That said, the stock is not cheap, so hold.