Investment Column: Investors will see little spark from BAT

Fenner; Bodycote


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.

Fenner

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.

Bodycote

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.

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
sportDidier Drogba returns to Chelsea on one-year deal
News
people
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
PROMOTED VIDEO
Sport
Louis van Gaal would have been impressed with Darren Fletcher’s performance against LA Galaxy during Manchester United’s 7-0 victory
football
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Rhys Williams
commonwealth games
News
Isis fighters travel in a vehicle as they take part in a military parade along the streets of Syria's northern Raqqa province
i100
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Life and Style
fashionLatex dresses hit the catwalk to raise awareness for HIV and Aids
Travel
travel
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform