RBC Capital downgrades Imperial Brands, slashes price target

The bank said that strong outperformance leaves the valuation looking in line with the company's prospects. "Prospects which, given a very small and lacking NGP business, look increasingly dismal."

RBC retained its ‘sector perform’ rating on BAT, but cut the price target to 2,900p from 3,500p.

"Despite the new CEO, in our opinion, setting more realistic expectations as well as the sizeable upside implied by our price target, we see little catalyst for outperformance until it can restart share buybacks," it said.

The bank said that new long-term assumptions in its adjusted present values for the tobacco stocks drive both price targets down almost 20%.

"We have increased cost of equity to 11% and reduced long-term growth expectations after BAT's £25bn write-down leaves us feeling gloomy about the sector's prospects," it said.

RBC said its long-held belief is that share buybacks are a major catalyst for outperformance in the tobacco space given a lack of investor appetite related to ESG constraints.

"This has driven our preference for Imperial Brands over BAT until today," it said. "The tables seemed to be turning for BAT as it pledged to reinstate share buybacks once it reaches net debt/EBITDA of 2.5x.

"We thought that was imminent, but BAT's acknowledgement that net debt/EBITDA is only now at 2.7x as a result of lacklustre financial performance has delayed that by around a year in our opinion. We now do not expect it to reach that hurdle until the end of 2024."