Fool's Eye View

[ November 27, 2000 ]

Comment: Imperial Tobacco

By Rob Davies (TMFEssex)

Carburton Street, London -- Everybody loves cash. And a company that spews out cash at the rate of half a billion pounds every year has got to be worth looking at. Except that in this case the company concerned is Imperial Tobacco (LSE: IMT) and not everyone is comfortable in investing in companies like this.

Nevertheless, let's look at the numbers. Imperial reported its results today for the year to September 23rd. At the current share price of 739p it is capitalised at £3.8b, add in £1.4b of net debt and we have an enterprise value (EV) for this business of £5.2b. Altogether this pile of capital, debt and equity, generated £593m of earnings before interest, tax, depreciation and amortisation (EBITDA) in the year. If we divide one by the other we get EV/EBITDA of 8.7, a ratio commonly used by the Wise to assess businesses.

In simple terms it means the company could earn all its capital back in nine years, and that means it is relatively cheap. But then it would be hard to ascribe a high rating to an industry with limited growth potential. However, while that may be true for the industry as a whole, this company is obviously doing something right. Revenue rose 16% in the year to reach £5.2b, pre-tax profit increased 13% to £450m and earnings per share added 13% to 62.6p. All this good news persuaded the directors to lift the dividend 15% to 31.7p and puts the shares on a yield of 4.2%.

This cigarette company is unusual in having so much of its business in the UK.

              Sales £m   Operating Profit £m      
UK              3,551            329
International   1,669            231

But all the growth is overseas. International sales are rising fast, up 78% last year, albeit boosted by acquisition. Whether that can grow fast enough to offset the stagnation at home is just one of the questions investors need to ask about this stock.

Where Next?

• Imperial Tobacco discussion board