Citi backs global tobacco sector, ups rating on Imperial and BAT

The UK's Imperial Tobacco and British American Tobacco have been upgraded by Citi, which is arguing that share prices across the sector are set to improve as the regulatory environment eases.

Citi said that tobacco stocks had struggled in 2018, hit by an increased regulatory threats, weakening cigarette trends in the US market and leverage concerns caused by the increase in credit spreads.

The shares have recovered marginally since then, but Citi argued: “The shares could still rise a long way because we think the environment will continue to look less threatening. We expect organic growth will pick up this year as NGP [next generation products] sales accelerate and we think the regulatory threat will probably move away from cigarettes.

“In 2019 there are not likely to be any significant new policies on cigarettes, so we think investors will gradually get more comfortable with the current proposals. We do expect even greater focus on e-vapor, but that may be positive for BAT and Imperial.”

Citi has upgraded Imperial Tobacco to a ‘buy’, with an improved price target of £30 against its previous target of £27. “We now expect almost 4% sale growth in 2019 and 2020, and the margins on NGPs should turn positive later this year. We prefer Imperial to BAT because sales growth is likely to be almost as good in the next couple of years, NGP margins should inflect much sooner and leverage is less of an issue.”

But the bank also upgraded BAT to a ‘buy’ and upped its price target to £36 from £30. Citi said it was forecasting around 50% growth in NGP sales this year, adding: “The stock has risen about 28% in the year to date, but we think that is more to do with the decline in credit spreads than a reappraisal of fundamentals.”

Citi also upped its price targets on Altria, Philip Morris International and Swedish Match, although it did not change its ratings.