Imperial Brands boosted by Goldman upgrade to 'buy'

Imperial Brands, formerly known as Imperial Tobacco, was a high riser on Monday as Goldman Sachs upgraded the stock to ‘buy’ from ‘neutral’ following recent underperformance.

It noted the shares are down 8% over the past month versus its European staples coverage and the broader market.

“Our 'buy' thesis is predicated on the company’s highly cash-generative business model (we forecast over £13bn of free cash flow generation over the next 5 years, equivalent to 39% of its current market cap), attractive average EPS growth (7% pa) and dividend yield (c.5% pa) in CY17-18E,” the bank said.

Goldman said upcoming catalysts include the first half results on 4 May and the Investor Day on 8 June.

The bank said consensus forecasts are not adequately reflecting the mix benefits from the inclusion of the US assets and the mix effect on operating margins due to lower sales in Iraq and Syria.

“In addition, based on average year-to-date and current FX spot rates, we estimate a 1.5% positive contribution to FY17 tobacco operating profits.”

GS added that while no change to management’s long-term guidance is expected at the Investor Day, an update on strategy – particularly on the US and brand optimisation programmes – could boost sentiment.

Goldman kept its 3,950p price target on the stock.

At 1046 BST, Imperial shares were up 3.4% to 3,693.50p.