“We continue to prefer Tobacco over Food”. That's not a lifestyle choice of Credit Suisse but a prelude to an upgrade to Imperial Brands PLC (LON:IMB).
The fags maker has been upgraded to “outperform” with a price target of 4,150p, up from 3,800p.
IMPS combines an improving share momentum as it derives benefit from the £300mln it has ploughed into various marketing initiatives with a bit of mergers & acquisition sizzle, as the big names gobble up the smaller players.
“In a consolidating consumer staples industry Imperial Brands is beginning to look cheap on 13.5x earnings with a 4.7% yield (growing at 10% a year). The discount to staples is about 35% (broadly 13x versus 20x),” Credit Suisse said.
“There is nothing new in highlighting that Imperial is long thought of as a consolidatee rather than consolidator – BAT just agreed to buy Reynolds at 16.9x EBITDA (Imperial currently trades on 12.2x 2016/17 EBITDA),” the broker noted.
With a free cash flow yield of 6.2%, IMPS tops the sector, and it also has the highest dividend yield (4.6%).
Credit Suisse reckons 10% dividend growth in sterling terms could be funded from Imperial's free cash flow for the next seven years if the group chose to go to a 100% pay-out.
On a sectorial level, Credit Suisse prefers the tobacco sector to food because the former enjoys a valuation discount and is, in the Swiss bank's view, relatively insulated from the factors weighing on the rest of the consumer staples sector.
IMPS' shares were up 0.8% at 3,824p in mid-morning trading.