The UK market is declining at 4 per cent a year, mainly due to bootleggers who are costing the industry dear. Tobacco duty is rising relentlessly which, although it has not yet had a significant impact on demand, must eventually hit sales. And it has seen the emergence of cheap discounted brands which will lead to a fall in industry margins. Gallaher has been able to offset this by cutting costs but it cannot go on doing so for ever. Throw in the European Union's decision to ban tobacco advertising and the threat of legal action from cancer victims and the prospects for the mature UK market look poor.
That means the key to Gallaher's success will be its expansion into overseas markets, particularly Eastern Europe and Asia, which are growing rapidly.
The shares, which rose 13p to 363p are sitting on a prospective PE ratio of 12 which looks flat. Gallaher should continue to prove to be a reliable performer. However, after a sharp rise in the group's value in recent months the stock now sits on an unjustified premium to rival Imperial Tobacco. High enough.Reuse content