Credit Suisse bumps up Imperial Tobacco target on cash flow

Credit Suisse upgraded its price target on Imperial Tobacco to 3,800p from 3,500p on the back of better-than-expected cash flow.

It said the company’s full year 2015 results provide further tangible evidence that its cost optimisation programme is delivering to the bottom line.

The bank said tighter control of working capital and net capex has meant Imperial has been able to absorb the cash costs of the cost optimisation programme (£300m so far) and still grow free cash flow faster than profits.

It added that free cash flow has been further boosted by this year’s US acquisition.

CS said that with the significant savings – around £100m – still to be delivered from the cost optimisation programme and potential to improve fixed cost recovery in the US, it sees further scope to lower unit cost over the next three years.

“This should allow management to deliver on their commitment to 10% per annum dividend increases (and reduce debt by around £1bn) at a time when dividend growth in the rest of the consumer staples sector is slowing.”

The bank reiterated its ‘outperform’ rating on the stock.

At 1556 GMT, Imperial Tobacco shares were up 0.5% at 3,519p.