Broker snap: Imperial hits 'tobacco wall', Nomura downgrades

17th Nov 2011 10:12

Imperial Tobacco, the manufacturer of Golden Virginia tobacco and Lambert & Butler cigarettes, has hit the "tobacco wall", according to Nomura, which has downgraded its rating on the stock from buy to reduce."[The] inability to expand margin as cost efficiencies run dry and the need to support sales growth via heightened investment in brands (while suffering lower returns), we term hitting the 'tobacco wall'," the broker said.Also, to reflect the absence of takeout probability in its valuation as well as the expected medium-term margin declines, the broker has cut its target price by 10% from 2,400p to 2,150p."Although we still see the potential for Imperial to be acquired ultimately, we do not see this materialising for 12 months as Japan Tobacco (a likely suitor) gets certainty on the government stake sale and demonstrates a willingness to increase its return of cash to shareholders."By 10:40 on Thursday morning, shares were down 2.08% at 2,305p.Nomura said that it sees Imperial's shares underperforming peers British American Tobacco (BATS) and Japan Tobacco. The broker also released a research report on UK-listed rival BATS this morning in which it reiterated its buy rating and raised its target price from 3,020p to 3,320p, saying that "medium- (margin and pricing) and long-term (volume exposure) trends support a premium."BATS shares still edged lower, trading 0.66% down at 2,930p.BC