Imperial Brands PLC (LON:IMB) got a boost on Friday as JPMorgan Cazenove upgraded its rating for the cigarette maker to ‘overweight’ from ‘neutral’.
The upgrade came as the US investment bank nudged down its target price for the FTSE 100-listed firm to 1,650p from 1,700p, albeit with the shares trading currently at 1,298p, up 2.2% on Thursday’s close.
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In a note to clients, JPMorgan’s analysts said: “We see current valuation as pricing in severe downside risks, leaving risk/reward tilted strongly to the upside following the dividend cut this May.”
They added: “Supported by its robust FCF (19% 21e FCF yield), we see IMB’s c50% payout ratio as sustainable with a further £1bn+ p.a. available for cash returns or M&A from FY23e in our base case. We forecast MSD MT EPS CAGR (vs tobacco peers and wider EU Staples at M-HSD) driven by more targeted NGP investment and continued tobacco margin expansion.”
The analysts also noted: “With IMB’s valuation discounting its listless direction, the arrival of new (external) CEO Stefan Bomhard provides free optionality should he show competency and his new perspective can begin to re-build investor confidence.”
“Our FY20e/21e EPS changes by 0%/4% as incorporate improved US tobacco growth and new NGP forecasts, including £200m of impairments in H220e. We lower our Dec-21 price target to £16.50 (30% upside) underpinned by our new DCF-based valuation methodology,” they concluded.