Stock Market Week: `Safe haven' status puts tobacco groups in Footsie

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The Independent Online
THE STOCK MARKET convulsions of the past few months have been enough to turn investors to smoking. As Footsie seesawed, stressed-out traders have been steadily pouring money into tobacco stocks - a classic safe haven in uncertain times.

The nicotine sector will receive a puff of confidence on Wednesday when two of its members look set to be admitted to the Footsie. Imperial Tobacco, the maker of Regal and Lambert & Butler, is odds-on to become a blue chip when the FTSE Actuaries Committee meets for its quarterly review of the indices. Rival Gallaher is less of a certainty but, barring any share slump today or tomorrow, should join the big boys a mere 19 months after floating.

The two stocks have benefited from the traditional defensive qualities of the tobacco sector. Little exposure to the vagaries of the international economy, an almost recession-proof pool of customers and little or no exposure to the costly US lawsuits have given the market what it most wants in times of trouble: a steady stream of earnings.

Imperial, demerged from the Hanson conglomerate in August 1996, has also made a couple of crowd-pleasing acquisitions. The pounds 185m takeover of Rizla, the rolling-paper maker, and the pounds 660m purchase of the tobacco interests of the Dutch giant Douwe Egberts Van Nelle were well received by analysts. They helped Imperial's price to rise over 68 per cent over the past year to Friday's close of 648p.

Gallaher, which makes Benson & Hedges and Silk Cut, has had a good run too, rising by a third to Friday's 433p. Analysts like the company for its strong brands and good international prospects.

Another rump of Lord Hanson's empire could join the Footsie on Wednesday. Hanson, the building materials group, could bring the name back to the main index. A string of bolt-on acquisitions in the US, where the road- building market is booming, have boosted the shares. The resolution of a long-standing legal dispute with the American authorities also helped to increase Hanson's market cap to around pounds 2.8bn - very close to the Footsie threshold.

In a bizzare coincidence, Hanson looks set to replace Misys. The IT group joined the Footsie in May when Energy Group, a former division of - guess what? - the Hanson conglomerate, was bought by Texas Utilities. The IT debacle at Wednesday's meeting will be completed by the ejection of Sema. The software group only entered the blue-chip club in September, but since then the shares have lost more than 20 per cent on fears of a dry-up in orders from big financial clients.

As two real IT stocks go out, one would-be IT company, Dixons, goes in. The electrical retailer has been the market's flavour of the past few months. Analysts have been inspired by the incredible success of its Internet service. Some have even been talking about a re-rating in line with the ballooning valuations of hi-tech stocks.

The Footsie revolving doors should also see Martin Sorrell's advertising agency WPP and the healthcare group Nycomed Amersham on their way out. The new Footsie configuration will take effect from December 21 to allow the index-tracking funds to pile up on the new boys and dump the has-beens.

The undercard will see a fair bit of change too. A dozen stocks are expected to drop out of the FTSE-250. The most eye-catching casualty is BICC. The construction and cable group, once a proud member of the top club, has been hammered by tough market conditions. Sales are still at over pounds 4bn but BICC has sunk to just pounds 250m, and a humiliating relegation to the small cap looks certain.

MFI, the flat-pack furniture retailer, the cash-and-carry group Booker, another fallen giant, and the textile company Coats Viyella will also be axed. They will be replaced by a four-strong "biotech pack". Chiroscience, Skyepharma, Powderject and Celltech will lead the beleaguered sector's charge into the FTSE-250.

The stock market week also features results from five Footsie stocks and one interest rate decision. The brewers will remain in the spotlight with results from Scottish & Newcastle and Greenalls. S&N, on the block tomorrow, is set to show a drop in interim profits, say to pounds 215m from pounds 224.5m. Beer sales have flagged during the wet summer, and S&N will lose around pounds 25m owing to changes to a supply agreement with the Grand Pub Company. Center Parcs, its leisure division, could post its first year of growth since 1995.

Grenalls' results, due out on Wednesday, will be mixed. The pub division is set to disappoint. Profits will be squeezed by the downturn in consumer expenditure and the dismal summer. Hotels should have had a better year, with most of the growth coming from the De Vere country hotels. Overall, analysts are shooting for interim profits of around pounds 159m compared with pounds 157m last year.

British Land, the property giant that reports today, is to be quizzed over the state of the real estate market following last week's bearish comments from rival MEPC. The developer, which owns a large chunk of the City's offices, is set to post flat interims of around pounds 46m.

A dose of buoyancy will be served on Thursday with the catering giant Compass's yearly figures. The City expects double digit growth to around pounds 160m, driven by big contract wins, acquisitions in the US and France,and the performance of its Upper Crust and Ritazza sandwich and coffee bars.

Stagecoach is also likely to please the City. The transport group is set to post interims of around pounds 90m, up from pounds 70.5m a year ago. South West Trains and the train leasing company Porterbrook will be the star performers.