Recent industry updates saw guidance for full-year sales cut, with UK, German, and Australian down-trading cited, along with emerging market weakness driven by a cluster of key countries.
These headwinds collectively comprise c60% of average industry sales and underlying profit (EBIT), the analysts said in a note to clients on Monday.
Having been confident 2020 would be the start of a multi-year sector re-rating, including the view that “at some point” the shift towards reduced-risk products (RRP) “is such that tobacco becomes ok from an ESG perspective”.
Detailed modelling of market data by Jefferies leaves the analysts convinced about their long-term positive view, actually nudging up growth forecasts out to 2023 to 5.0% from 4.7%.
“Furthermore, we see long-term downside risk as limited, with EBIT growth to FY23 still at 2.5%. Possible upside also attractive at 6.5%.”
For Imperial Brands the price target was upped to 2,100p to 1,700p, with Japan Tobacco also hiked, although the analysts said, “any sizeable average sector re-rating will likely have to wait, 12-month potential upside on these names remains compelling as these names look better placed than others to withstand pressures and actually see support".
BAT, however, was cut to ‘hold’ from ‘buy’ and the target slashed to 3,000p from 4,800p, as the analysts noted concerns the deep US discount and relative exposure to ‘risk’ emerging markets, a lack of “near-term RRP conviction”, some “questions over management “control/visibility” after the recent change in guidance, and valuation.