Gallaher “could puff further upwards”
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Charlie Gibson Jan 25, 2006
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There is every chance that the UK will soon enact a complete ban on smoking in pubs and restaurants. That sounds like it will be bad news for cigarette firms, but how hard will it really hit them?
Not as hard as you think, says Mark Paul in The Sunday Times. Morgan Stanley suggests that overall UK sales will fall by only 4%-5%. When a ban was enacted in Ireland last year, sales did fall (by around 5% for Imperial Tobacco, for example), but they are now showing signs of perking up again. Indeed, Gallaher reports that its sales in the Irish Republic increased by 1.3% in the first ten months of the year.
More of a worry than a ban, says Nick Hasell in The Times, should perhaps be the rise in pricing competition in the “critical profit powerhouse” of western Europe in recent years. Gareth Davis, CEO of Imperial, has admitted to “much more price aggression in the last two years” and ABN Amro has downgraded the entire sector as a result.
It should have made shares in Gallaher (GLH, 854p) an exception to this downgrade, says Investors Chronicle. The firm has significantly improved its efficiency in its core markets (productivity at its factory in Northern Ireland has “jumped by more than a fifth”) and it’s doing an excellent job of growing sales in emerging markets, where its products command a premium price. And insofar as there is a price war in Europe, Gallaher is the firm making the running – its share of the ‘value’ segment of the UK market (ie, its Sterling brand) has risen to a record high of 36%.
Shares in Gallaher have not fully participated in the rally that has seen the overall sector outperform the market by 400% since 2000. Add this to a reasonable valuation (the shares trade on a p/e of 17.6 times and yield 4.2%), as well as ongoing potential for mergers and acquisition activity in the industry, and Gallaher “could puff further upwards”, concludes Investors Chronicle.
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