The Investment Column: Slowdown unlikely to make Imperial's prospects fizzle out

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The Independent Online

Imperial Tobacco

Our view: Fairly priced

Share price: 2365p (-5p)

The predictable decline in cigarette consumption in mature markets of the world driven by smoking bans and health issues appears to exercise little restraint on the growth of Imperial Tobacco. The current year to September is picking up from where 2007 left off with improvements in volumes, market share gains and earnings.

However, there are niggling worries about rising competition in the UK which contributed to a sell-off in the shares before they clawed back most of the losses.

Even so, Imperial remains a copper-bottomed defensive stock in times of economic distress. Existing smokers will probably smoke more, while those trying to kick the habit will find the task even tougher as financial pressures increase stress levels.

In the UK, where smoking was banned in all pubs and restaurants last July following similar action in Scotland the year before, the total cigarette market fell by 4 per cent during 2007, which is broadly what Imperial anticipated. In the current quarter since October, Imperial's market share has been stable at 46.4 per cent, despite increased competition, while it is probably too early to see what impact an 11p-a-packet rise in the price will have on overall sales.

The German market fared worse, falling 6 per cent, although its market share edged up to 21.4 per cent. It made progress in most European countries, achieving price rises in Spain and Italy.

But future growth will come from Eastern Europe and Africa.

Immediate attention will focus on integration of its £11bn acquisition, French-Spanish rival Altadis, best known for Gauloises and Fortuna. The deal strengthens Imperial's position in leading European markets.

The shares have slipped 13 per cent from their best levels of last year, and at the current price sell on 15.7 times forecast earnings for 2008. In what promises to be an uncertain year for consumers everywhere, they are probably fairly priced.

Prudential

Our view: Hold

Share price: 654p (+19p)

While the world rocked on its axis, the Prudential showed there is nothing like fears of a financial meltdown to send people scurrying for safe savings products. The company yesterday reported sales comfortably up from £2.47bn to £2.87bn and largely in line with market expectations.

The engine of growth proved to be Asia, where business grew by a thumping 44 per cent, to £1.31bn, the largest contribution from any region. India grew sales 67 per cent and Indonesia 75 per cent. The results underline the region's growing importance, although the company admits that it will be hard-pressed to achieve the same kind of performance in the current year.

Jackson, the Prudential's US insurance arm, delivered strong sales growth of £671m, up 19 per cent, helped by demand for variable annuities.

At home it was a different picture. The UK made the second largest contribution, of £897m, but this showed little growth over 2006. The market grew increasingly competitive, and Prudential concentrated its firepower on more profitable retirement savings products.

On the asset management side, the leading brand M&G saw net inflows of £5bn, 19 per cent down on the year before, although the figure is still the highest it has ever achieved.

The current year will be more testing as household budgets come under growing pressure and people attempt to pay off debts rather than invest in new savings products. However, the Prudential hopes its focus on providing retirement products which tend to be less sensitive to economic swings will offset weaknesses elsewhere.

The shares are 21 per cent off their 2007 levels. Hold.

Straight

Our view: Avoid for now

Share price: 64.5p (unch)

It seems a marketing miracle that anyone can sell water butts in Britain. But the drought of 2006 saw them flying out of DIY sheds as gardeners saved every precious drop of rain.

It was so different last summer – as the AIM-listed recycling products group Straight can testify. The poor weather decimated sales of butts and other products such as home composters. Fortunately, the more stable side of the business – selling waste containers such as kerbside recycling boxes to local authorities – did well, although not enough to plug the financial leaks from all those unsold butts.

So the shares, which touched 270p, have fallen to 60p, where it is valued at just £7.4m.

Hopes of a recovery this year are not resting with the weather alone. The company is investing in a new range of recycling products such as an improved version of a wheeled bin which keeps materials separate. The group is hoping that demand will come from the Government's campaign to encourage separation of food and other waste in bins.

With 2007 profits expected to be down from £2.3m to £1.5m on a 15 per cent fall in sales, a turnaround depends on the success of its new products – and, of course, the weather.

Avoid for now.

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