Barclays upgrades Imperial Brands on improving margin confidence

Barclays upgraded Imperial Brands to ‘overweight’ from ‘equalweight’ and lifted the price target to 4,200p from 3,750p, driven by more bullish medium-term expectations.

The bank said organic sales momentum is improving and margin/cash generation increases underpin dividend growth of 10%+.

“Moreover, we are increasingly confident margins will surprise to the upside and that the US is performing ahead of expectations.

“Given increasing competitive threats from new entrants elsewhere in Staples, the ongoing high barriers in Tobacco should continue to protect the profit pool.”

In addition, Barclays argued that regulatory fears over issues such as the revised EU Tobacco Products Directive (TPD) and plain packaging in the UK and France are overdone.

“With the UK accounting for c. 10% and c. 15% of group sales and EBIT (Barclays estimates), respectively, and in light of the significant down-trading witnessed in Australia after the implementation of plain packaging in 2012, investors’ concerns on the potential damage to Imperial’s UK business are understandable,” the bank said.

However, Barclays said Imperial was well prepared to weather any storm.

It said the impact of plain packaging in the UK/France and EU TPD will be benign.

“Implementation costs are already in estimates, while Imperial’s Australian experience and the narrower price gap between mainstream/economy brands should limit the impact of down trading.”

At 0948 BST, Shares were up 1.9% to 3,731p.