Investment Column: Imperial's shares are a defensive bet

M&C Saatchi; Telit Communications

Nikhil Kumar
Thursday 22 September 2011 00:00 BST
Comments

Our view: Buy

Share price: 2,103p (+10p)

Imperial Tobacco has been hit by a price war and smoking ban in Spain this year. But yesterday the maker of Davidoff cigarettes reassured the market that its performance for the year to the end of September remains in line with management's hopes.

While the price war in Spain has effectively come to an end, the City does not expect this to deliver any benefit for its full-year 2011 figures.

That said, there is plenty to recommend Imperial Tobacco's shares, if not the impact of its product on customers' health. Analysts at Investec have estimated that the company ended the year on a high and forecasted growth in fourth quarter revenues, excluding acquisitions, of 2 per cent.

This uplift was driven by price increases, as its volumes fell by around 2 per cent. These figures represent an uptick on its performance in the third quarter and are in line with those expected by Imperial Tobacco over its full year. Indeed, when Spain and the impact of a price increase in the UK is excluded, Imperial Tobacco expects full-year revenues to be higher by 3 per cent, with the volume of cigarettes sold falling by less than 1 per cent.

The company cited strong contributions from its Eastern Europe, Asia-Pacific and Rest of the European Union countries. Given this performance and its attractiveness as a defensive stock in a downturn, we feel the market is currently undervaluing the business.

Its shares trade on a forward earnings multiple of 10.3, which is a slight discount to the sector. We think this is highly attractive valuation for a company, whose customers continue to buy its products on a massive scale, despite relentless price increases.

Above all, however, we are fans of Imperial Tobacco from an income perspective, although we also note the £500m share buy back underway. In May, the company raised its interim dividend by 16 per cent to 28.1p and it committed itself to growing its dividend per share ahead of adjusted earnings per share after 2011.

Oh, and don't forget its shares currently yield a juicy 5 per cent. So overall, we think Imperial Tobacco is a stock for troubled times.

M&C Saatchi

Our view: Buy

Share price: 125p (+8p)

M&C Saatchi is the advertising agency behind the Keith Haring meets Play-Doh-style Change4Life campaign to get Britons living healthily.

Looking at yesterday's results, this year has been plenty healthy for the company's balance sheet. The six month numbers to the end of June beat analyst expectations that sent the shares soaring in the morning. The organic revenue growth was particularly impressive at 21 per cent, which Charles Stanley pointed out was the largest of all the agencies.

Pre-tax profits were up 24 per cent to £7.7m, while reported revenues rose 23 per cent to £79.1m. The company also enjoyed some significant client wins during the time including Google, Siemens, Pernod Ricard and Lenovo.

The group is expanding internationally, and the investment is clearly beginning to pay off. But the engine of its success is still in its domestic market of the UK where revenues were up almost a quarter. The company has £14.8m in cash on the balance sheet and upped its dividend yesterday up 15 per cent to 1p.

As for the shares, the consensus price is 8.1 times estimated full year earnings, falling to 7.4 times the following year. As Charles Stanley analyst Richard Nunn points out, this is against a sector average of 10 times, and with a strong outlook. It's time to get involved.

Telit Communications

Our view: Buy

Share price: 72.5p (unchanged)

Telit specialises in technology that allows machines to wirelessly communicate with each other. This is a growing market, boasting a strong outlook, not least because of legislative moves such as the EU push to have safety boxes in cars from 2015. The idea is to have the devices alert the emergency services in the event of a mishap. And the underlying technology is, well, right up Telit's street.

Recent half yearly results showed good progress, with revenues rising by 36 per cent, and pre-tax profits climbing by nearly 90 per cent.

Moreover, the stock is affordable, trading on multiples of 7.7 times forward earnings for 2012, according to Northland Capital Partners. Given the growth prospects, and the strong results, we'd tuck in.

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