Investment Column: Results highlight Imperial's strengths

Sage; Wincanton

Edited,Nikhil Kumar
Thursday 03 February 2011 01:00

Our view: Buy

Share price: 1,900p (+106p)

Surgeons who operate on those suffering from smoking-related cancers may want to look away, but, at least from a financial perspective, Imperial Tobacco delivered an impressive set of results yesterday.

The maker of Lambert & Butler and Golden Virginia said its combined cigarette and fine-cut tobacco sales volumes rose by 1.2 per cent in its first quarter to 31 December, driven by strong performances in Eastern Europe, Africa and the Middle East, and Asia Pacific.

This growth represented a rebound from the 2.9 per cent decline in volumes for the year to the end of September. In its latest quarter, Imperial Tobacco cited particularly strong growth of 7 per cent for its "global strategic" cigarette brands of Davidoff, Gauloises Blondes and West.

Yes, the company did cite declines in Poland and Greece, while volumes in the Spanish market sank by 10 per cent to 78.1 billion sticks, following a significant increase in duty and a ban on smoking in public places in the country in the quarter. But these were rare blemishes in a decidedly upbeat statement which helped to send Imperial shares up sharply yesterday.

Despite this, the FTSE 100-listed tobacco maker trades on a forward earnings multiple of just 9.5 times. And if the update on trading was not enough, further good news for investors came in the shape of Imperial revealing plans to raise its dividend payout ratio to 50 per cent of adjusted earnings this financial year – two years ahead of some City estimates.

Elsewhere, its underlying revenue growth of 5 per cent in the fourth quarter points to Imperial Tobacco's success in pushing through price increases. Overall, then, Imperial's performance vindicated the multiple buy recommendations on the stock from City analysts. We tend to agree, although the medical profession won't like it.


Our view: Hold

Share price: 300.7p (-1.3p)

Sage provides business management software and services to help small and medium-sized companies get on with running their operations.

Following the group's bullish first-quarter update last month, which revealed that small companies were still spending on IT and revenues were growing, the new chief executive, Guy Berruyer, stood up in front of analysts to present his vision for the company yesterday. He looks like a safe pair of hands.

The group sells software to 6.3 million small and medium enterprises, and said its principal markets had continued to recover in the first quarter after strength at the back end of its last financial year. The most recent numbers said growth in its core market in North America, which makes up almost 40 per cent of revenues, was slightly negative, but analysts are confident that the tide will turn soon.

The company's statements were fairly vague at the time of their first-quarter update, but things appear to be moving, albeit gradually, in the right direction. The company has also slashed its debt to about £220m.

The long-term picture looks good, but margins are expected to be fairly flat this year. Valued at 14 times forward earnings, Sage looks well priced. Hold for now, but this could evolve into a buy depending on the success of the new strategy.


Our view: Buy

Share price: 136.5p (-8.5p)

Wincanton, the haulier which transports goods around the UK and mainland Europe, endured a fairly uninspiring session after posting a trading update yesterday.

Investors fled, with its shares falling by nearly 6 per cent, after it said that trading conditions remain challenging, "although results for the year to 31 March are expected to be in line with management's expectations".

We think the market was being unduly harsh. Instead of fixating on the tough environment, investors would do better to focus on the company's self-help moves.

The new management team has decided to take the bull by the horns, with debt reduction a priority. This is encouraging, as are the restructuring moves afoot in France, and the drive to identify cost savings in the UK.

Moreover, Wincanton trades on a woefully thin valuation of about 7 times forward earnings. We admit that the current trading picture is less than cheerful, but signs of a successful restructuring in coming months will, we think, help the stock to climb higher as market regains its confidence. Buy.

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